September 22, 2016
It’s a question I hear regularly for people of all walks of life: How to I build (or rebuild) my credit? Follow are some simple steps that can contribute to better credit ratings, whether you’re starting with no credit or have some bad credit history already. The list is not exhaustive nor are the guaranteed to help you (state and federal regulators require that I tell you that).
Free and Easy Steps and Can Help a Little
1. Ask a family member with good credit to add you as an authorized user to their current credit card account(s). You do not even have to use the card (or even ever see it). It has no impact on the family member’s rating, and their good account activity can help your own standing before creditors. Keep in mind, though, that the family member is responsible for any charges made on the authorized user’s card.
2. Some states allow utility companies to report your history of payments to the credit bureaus. You do have to ask, though, and the utility companies are not necessarily required to report, so ask nicely… with sugar and a cherry on top.
3. Correct errors on your credit report. We all have the right to a free credit report from each of the three main credit bureaus (Equifax, Experian and TransUnion) every twelve months through www.AnnualCreditReport.com. You can access your report for free and immediately online, or you can order them by phone or by mail. Check the report for accuracy and dispute negative information that is older than 7 years, that is reporting a balance that has been paid off, or that shows late payments when there were no late payments. Please feel free to contact me, one of our credit counselors, or another nonprofit credit counseling agency for a free credit report review to help you understand what is on your report.
Simple and No- or Low-cost Steps
4. Generally, I suggest that you do not apply for more than one or two new accounts each year, but to start, you might consider a tire/brake store that has its own finance department. Gas station cards are other possible places to start. They tend to be a little more liberal in their application approvals, but they compensate for this risk by charging higher interest rates. If you need to purchase tires for your vehicle anyway, save up the cash, apply for the loan at the tire store, and then pay off the loan almost immediately. Some well-meaning so called experts will tell you that you should not pay off the loan because you need to establish a history of on time payments. To maximize your credit rating, this may be true, but you do not need to maximize your rating; you just need to build it. If maximizing is your chosen way, it means you’ll end up paying interest, so to minimize interest payments try this. Once your account is approved, register with the lender for an online account, link it to your bank account, pay off all but $50 or so, and then make $15 or so payments until the account is at $0. This will give you 6 or more months of payment history while also minimizing the interest you are charged.
5. Retail store cards are also generally easier to qualify for. Just do not make purchases for the sake of building your credit. Make purchases that you would have made anyway. JC Penney is one example. Let’s say you were going to may a $50 purchase there and that you already had the money saved in your checking account or in cash in your purse or wallet. When applying for an account, they might give you a discount on your first purchase. Don’t go crazy. Keep the purchase to way you would have purchased without the discount. Then, after being approved, do not even leave the line. Inform the cashier that you would like to pay off your account balance right then and there. This way, you leave the store with a new open account in good standing with no balance and a payment history. If you waited to pay until the bill came in the mail, chances are you would have spent that money elsewhere and would then be in trouble trying to come up with the minimum amount due. Other stores that tend to have lower approval standards include Ann Taylor, Bath & Body Works, Express, Gamestop, Loft, and Victoria’s Secret, among others using Comenity Bank. Target’s Red Card can also be an effective place to start.
More Expensive but Effective Steps
6. Finding a secured credit card can help, although they usually come with high annual fees (sometimes even monthly fees). Just make sure that you get it in writing that the card company will report your credit usage history to all three consumer reporting agencies.
7. Some banks and credit unions offer credit building loans of $500 to $2,000. They typically require proof of employment. After approving your application, they place all or part of the loan into a secured savings account that you cannot access until you have paid the entire balance due. While the secured savings account earns interest (pittance), you are likely paying 8% to 15% or even more on the loan. Still, that’s better than the corner finance store that will charge 20% to 30% or more and makes it as difficult as possible to pay off the loan.
Don’t Forget the Basics
Regardless of the above steps, the fundamentals of building (or rebuilding) credit remain in place:
- Make at least your minimum payments on time
- Pay down (or even better, off) your balance every month
- Don’t apply for too many accounts within a short period of time (1 to 2 a year is reasonable)
- Get current on accounts that are late
- Do not close accounts that are in good standing
These do not account for all possible ways to build or rebuild credit, but they provide a generally good strategy. If you have some ways of your own, please feel free to share.
Have a great week!