How to Build Credit
When I was working in consumer, residential and commercial lending, I saw hundreds of credit reports. I have seen everything from impeccable credit reports to scores just barely above the 300 range. If you have excellent credit, congrats and great job. It does take mindfulness and diligence to have a great credit score ranking. If you have poor credit, there are small (and big) things that you can do to improve it. If you have no idea what your credit looks like, now is a great time to find out! Below are some tips on how to build credit.
What’s on your Credit Report
The first thing to know when you’re wondering how to build credit is to determine what is reporting on your credit report. Even if you think you have flawless credit, it’s a good idea to check it 3 times a year, just to make sure no fraudulent activity is occurring. There is a government-based online site where every American citizen can check their credit, 3 times a year, completely free of charge. It doesn’t impact your credit score, or ding you when you check it. It was created to help inform consumers of the contents of their credit report, and to monitor for fraud.
Annualcreditreport.com is where you can view everything that shows up on your credit, from the 3 largest credit reporting companies in the US. As previously mentioned, it is absolutely free (and safe), and you’re not required to sign up for any trials or memberships. You can view everything that is reporting to your credit, but it will not show your credit score. If you are interested in seeing what the actual score is, you have the option of purchasing that information for a one-time, nominal fee.
Don’t Have any Credit?
If you are young, or have made only cash purchases and haven’t had the need for credit before, your credit score is likely 0. Some people say that no credit is worse than bad credit, but I disagree. It is hard, but not impossible, to get a loan without credit. The easiest way to build credit is through consistent and timely payments on a small installment loan or a line of credit. Keep in mind that if you are using a line of credit (i.e. a credit card), you need to be responsible with its use. Don’t exceed 2/3rds of your credit limit, or it will reflect poorly in your score. Here are some ways to secure a line of credit or installment loan if you have no credit:
- Get a co-signer: If your parents, grandparents, spouse, siblings, or very good friends have good credit, you can see if they may be willing to help secure a loan. A co-signer assumes the risk of the loan in the event that you default, so only get a co-signer if you’re certain you can meet the obligations of the debt, and make every payment on time.
- Get a secured credit card: Many banks offer secured credit cards. You deposit $500 (or some denomination) of money into a checking or savings account, and the bank will issue you a credit card secured with those funds. It allows you to build credit, without the bank exposing themselves to risk of default.
- Apply for a retailer credit card: Credit cards issued by retailers (Lowes, Sears, or a clothing store) generally have more lax standards than regular credit cards. It is easier to obtain one with little or no credit, and if
used responsibly, they can help boost your credit score.
Have Bad Credit?
If you weren’t taught responsible money management, or the importance of maintaining good credit, it can be easy to just skip a payment, here and there… or not pay back debt that is owed. However, not paying back a debt or financial obligation is the same as stealing, and it can lead to garnishments of your paycheck, extra fees, and possibly jail time. It is in your best interest to address and make arrangements to meet these obligations.
Tax levies, unpaid child support, and collection accounts also appear on your credit, and it is important to take note of those and make arrangements to correct them.
Here are some steps to take if you have bad credit:
- Check your credit: Start by checking your credit to determine what debts are outstanding. Then create a budget to determine how much money you have available to tackle your debt. If there is no money available, you need to reduce your expenses. or increase your income. Once you’ve determined how much money you can spend a month to payoff your debt obligations, write out all of your debts on a piece of paper or in a spreadsheet. Sort them from smallest to largest. Start by applying any extra money you have to the smallest debt. Then when that debt is paid off, apply that payment and the excess money to the next smallest debt. And so on, until you have paid everything off. This is the debt snowball that Dave Ramsey preaches. It works.
- Negotiate your debts: Often times when you’ve defaulted on a debt, you rack up hundreds of dollars in fees from the debtor or a collection agency. If you call to make arrangements to pay it off, you can also negotiate to have some or all of the fees removed, and have the record removed from your credit. I have seen some people wipe away thousands of dollars from their debt, just by using this tactic.
- Don’t get more credit: If you have bad credit, it’s most likely due to the fact that you over extended yourself, and couldn’t meet all of your financial obligations. Stop the cycle by making a vow to not request anymore credit, until everything else (except perhaps a mortgage or student loans) is paid off. Your mission is to pay off debt, not acquire new debt.
- Pay down maxed-out balances: If you have credit cards that are close to, or exceed their credit limit, it can drop your credit score significantly. When prioritizing what to pay down first, pay close attention to those maxed out balances.
- Too many open balances: Having too many balances on too many cards or installment loans can ding your credit as well. Try to close out any open credit cards that you are not using. However, length of credit is also a determining factor in your credit score, so it may be a good idea to keep your oldest credit card open.
- Make all of your payments on time: Every time you get paid, it’s essential to make note of any payments that are due, and when they are due. I highly recommend a spreadsheet to keep track of any payments when you’re setting up your budget. That way, you make sure all of your payments are made on time.
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What tips do you have on how to build credit?