Building solid credit is analogous to building a house. You need a strong foundation, good maintenance habits, and dedication to make sure that your final product is worth living with. You also need a certain bit of know-how to make sure that the credit home you build is structurally sound and won’t come crashing down. Unfortunately, for those with very little or no credit history, it can seem nigh impossible to get that initial foundation set, especially when no one will give you credit in the first place.
Well, grab some eye-protection because in this two-part series I am going to help you build the credit house of your dreams. Today, I’ll introduce you to 4 tools that can help you construct the base for a solid credit history: secured credit cards, a credit-builder loan, a co-signed credit card/loan, and authorized user status on another person’s credit card.
Secured Credit Cards
A secured card is covered (secured) by a one-time upfront cash payment that you make, which is usually the same amount as your credit limit. For example, a secured card with a $200 credit limit requires a $200 upfront payment.
You can use this card like any other credit card – buy stuff, make payments ON TIME or before the due date, accrue interest if you don’t make payments in full – which makes it a great tool for practicing healthy credit habits.
This is a great option for when you’re starting from scratch, but it isn’t meant to be used forever. Secured Credit cards are designed to build enough credit for you to ultimately get an unsecured card that doesn’t require a deposit and features those incentivizing BONUSES.
Tip: When choosing a secured card, make sure you look for one with a low annual fee and make sure it reports to the three major credit bureaus: Equifax, Experian, and TransUnion.
A Credit-Builder Loan
As the name suggests, this tool is designed to help people build credit. Credit-builder loans typically range from $500 to $1,500 and are offered to people who need to build up their credit score, but already have a stable financial situation. There are three main types of credit-builder loans: Standard Secured, Secured by Loan Funds, and Unsecured. I go more into depth in the article, Credit-Builder Loan Basics.
For those without a credit history, you can achieve a credit score in the mid-to-upper 600s or even low 700s depending on the length and size of the loan. If you’re starting with bad credit, the loan should increase your score by about 20-25 points. If you make all the payments on time and keep the rest of your accounts in order, this can be the perfect tool for building a credit history.
Tip: Make sure your loan duration is at least 7 months as it takes about 6 months to get a FICO (credit) score.
Co-Signed Credit Card/Loan
Share the responsibility (liability) of a line of credit or loan with someone you (hopefully) trust! Co-signed loans/cards may be an option for those who don’t qualify for loans/cards on their own. You can utilize your co-signer’s credit history as a vote-of-confidence for you own credit-worthiness. Just remember that this is a huge responsibility for the co-signer with credit history. They are now liable for debt repayments, may not be able to get other credit, and the loan/credit card will affect their credit score. These obligations are negotiable as part of the initial terms that must be agreed upon and should be carefully considered.
Tip: Choose a relative or significant other with both a great credit score and stable finances, if possible.
Authorized User Status
If you are a particularly silvery-tongued individual, you may be able to convince a family member (or lover) to add you onto their credit card as an authorized user. As an AU, you enjoy access to a credit card and build credit history without any legal obligations to actually pay for the charges. I suggest you come to a mutual agreement with the primary cardholder on how you’ll use the card before being added. If they expect you to fork over some dough for the charges you rack up, please be a good user and do so.
Tip: Make sure the card issuer reports authorized user activity to the 3 credit bureaus; otherwise this tool will be pointless.
When used correctly, these tools will substantially expedite building the foundation for the credit home of your dreams. However, this process does take some time so remember to be patient, stay dedicated, and always wear eye protection. Click here for Building a Credit House Part II, where I detail good habits and maintenance techniques to make sure that everything stays standing.