Building a solid credit history might seem challenging, but no worries, here are a few key steps that can get you started.
Nowadays, it seems that everyone has a good credit history, and every day you hear that someone just qualified for a home loan getting a low rate or better terms.
That’s partially true. But the facts are different.
According to Consumer Financial Protection Bureau (CFPB) research, 11% of the adult population in the United States (or 26 million people to speak numbers) don’t have a file at the leading credit agencies, and 8.3% (or 19 million) haven’t enough credit history on their file even to calculate a credit score!
And if you’re a young person just starting or have a lower income – you’re more likely to fall into this ‘credit invisible’ group.
Building an excellent credit history may seem complicated, indeed. Especially when you read on the Internet that ‘all you have to do is track your record of making regular credit card and loan payments.’
But how to qualify for a credit card or loan in the first place if you don’t have a credit history at all?
First things first: open a checking account.
Some banks let you do it with as little as $25 to begin with. Be sure to keep up with your bill payments after you set up your account as well.
Beneficial tip: You can use auto-pay or account alerts not to miss your payments.
Once you’ve built a banking track record, you have five choices to consider:
1. Fill the form for a Secured Credit Card.
A secured credit card is a traditional first-time buyer tool for those with little or no credit history. It’s usually simple to qualify for one. All you need is to put down a deposit (between $250 and $500), which serves as your credit limit.
A great place to start is your local bank or credit union, where you hold your checking account. If you’d like to have additional help – you can receive free one-on-one advice from a financial counselor who works with such cases. You may discover one by checking the Financial Empowerment Center, a national nonprofit organization.
If you pay your bills on time for six to eight months, or even a year, the card provider will return your deposit and give you an unsecured card with a bigger credit limit (in some cases, no extra fees and cash-back benefits).
A secured credit card is the lowest-risk credit-building alternative for most people.
A secured card method worked for one client with a limited credit history and 550s credit score.
In 2018, he began working with a financial counselor, who advised him to go for a secured credit card. He took this advice and got a secured credit card. After making regular payments for six months, the client was promoted to an unsecured card with a more generous credit limit! Moreover, his credit score has increased to 670, putting him in prime.
It took some time, but it worked.
2. Get Added to the Account of Another Cardholder
If you have a family member or friend who is ready to help you build credit, you may ask them to add you as a co-signer to their credit card account.
What’s co-signing? It allows two people to be on the same credit card account, which means you’ll have the same credit history. You both should make regular payments and maintain the amounts paid off. So, if any of you forgets to do it, this late payment will negatively impact both accounts’ credit records.
Because regular payments increase your credit scores, this is a popular choice for parents who want to help their children develop credit as well, as you can be added as an authorized user to the account of another existing credit user. However, because the cardholder is still accountable for the card payments, the impact on the young person’s credit score will be minimal, but it will help to develop it anyway.
3. Consider Getting a Credit-Builder Loan
A credit-builder loan may be an excellent option for you if you can cover regular payments for a few months or a year. These are short-term loans, usually ranging from $250 to $2,000, aimed to assist people with limited credit records in building credit.
You may apply for one of these loans via credit unions, various banks, and online financial institutions. The application process is identical to getting a personal loan; however, credit-builder loans work more like forced savings programs.
The bank places the cash you borrow in a savings account or CD, and you don’t have access to it until you make monthly payments during the loan’s term, which is usually six months to two years. Those payments include interest, although the rates will probably be lower than credit card rates ( ranging from 6% to 16%), and you will indeed be charged a fee (ranging from $25 to $50). So it’s essential to shop around because costs can differ widely.
Remember that your loan payments will be submitted to major credit bureaus, assisting you in developing your credit history.
According to CFPB research, this method was most beneficial for applicants with no current debt, increasing their chances of having a credit score by 24%.
4. Think About Store Credit Card
Applying for a store credit card is another way to build your credit score. These cards are usually easier to get than ordinary credit cards, although you should have some credit history as well.
Store cards are classed into two categories:
- One may only be used with one retailer. It may also be applicable to the retailer’s partner brands.
- The other is a Visa, MasterCard, or American Express card, which bears the brand’s name but may be used everywhere connected with that payment network.
Store cards sometimes have more considerable interest rates than ordinary cards. Lately, the average interest rate for retail cards was 24.35%, while regular cards had a rate of 19.92%.
No matter which option you choose, you should trust the process. It might take months to establish good credit, but it’s worth waiting.