How To Build Credit | Money
You might think that the only thing worse than having bad credit is not having a history of credit. After all, it can be difficult to get a car loan or credit card if lenders have no way of assessing whether you’re likely to make payments on time.
Having a credit report with little information – called a “thin file” in credit score industry jargon – can be intimidating. This is often the case with adolescents or newcomers to the United States. Not being able to open a postpaid cell phone account or having to hire a co-signer to buy a car or rent an apartment can be a headache, and not having any credit on your behalf limits your ability to achieve financial freedom.
But the good news is that unlike most negative credit activity, which stays on your credit report for seven years, you can start building credit much faster. Dara Duguay, CEO of Credit Builders Alliance, says that just six months of on-time payments to a credit account can generate a credit score. You might not have good credit from the start, but you can work your way all the way.
“On average, the Credit Builders Alliance has found among our lender members that the FICO is around 650. Depending on the unsecured credit card provider, they may be able to get a credit card in the mid-600s.” , she says.
Why your credit score is the key to building good credit
A credit score is the three-digit number that distills your personal financial activities into a ranking that helps a credit card company or financial institution determine whether to extend credit to you and what interest rate you’ll pay.
“You need active lines of credit,” says Galen Gondolfi, spokesperson for Justine Petersen, a non-profit financial education and assistance organization based in St. Louis. “If you don’t have active lines, your credit score is not going to increase. “
There are three major credit bureaus: Experian, TransUnion, and Equifax. These companies compile your credit report, a collection of data points about your financial habits that are basically the building blocks of your credit score. The most commonly used credit scoring model is a FICO score, which ranks your creditworthiness on a scale of 300 to 850. VantageScore is another scoring model developed by credit bureaus; it has the same numerical range, although its formula for evaluating solvency and risk is a little different.
Although the criteria vary depending on the individual circumstances of the lender and the borrower, a higher score of 800 is usually took into consideration excellent, whereas anything between 580 and 669 is considered fair, and anything below 580 is considered poor.
FICO uses five different categories of information to calculate your credit score: Payment history; amounts owed as a percentage of your available credit, also known as the credit utilization rate; length of credit history; the types of credit you have opened and how much of your credit is new credit.
How a credit-builder loan ban helps build credit
A credit loan is a tool that can help you build credit even if your credit history is poor, says Jeff Richardson, spokesperson for VantageScore Solutions, based in Stamford, Connecticut.
“A credit builder loan is usually available from credit unions,” he says. “Basically, you open up a debt and pay it off, and that gets reported to the credit bureaus,” he says.
A constructor loan is an installment loan, that is to say it has a fixed term, a fixed interest rate and monthly payments. Unlike conventional personal loans, you don’t have access to the money when you take out the loan, but the advantage, especially for people who don’t have a lot of extra cash, is that you don’t have to. prepay as you would. with a secure credit card.
“The borrower pays a set amount each month, and at the end of the loan period, the money is returned to the borrower,” Duguay says. (The money accumulates in a savings account in the meantime.)
If you successfully complete the repayment plan for a credit-builder loan, then you will have access to the money you made the loan payments on, which you can then use to get a secured credit card.
However, if you can afford it, you don’t have to take your credit initiative step by step. “Having a variety of types of credit helps build a credit score,” says Duguay. In other words, having a secured credit card – which is revolving credit – as well as a credit loan – which is an installment loan – makes you more creditworthy in the eyes of lenders. (You also don’t necessarily need an installment loan to get an installment loan on your credit report. If you have student loans, they’re also installment loans, and make consistent payments on time. also adds to your credit activity. Auto loans are another common example of installment loans.)
How a secured credit card can help build credit
“Secured credit cards are hardly refused to anyone,” says Gandolfi, with the possible exception of people who are less than a year away from filing for bankruptcy. Unlike a credit loan, you have immediate access to credit with a secured credit card, but the downside for some is that you have to find the money for a deposit which can cost anywhere from $ 50 to $ 200 initially. Visa, Mastercard and Discover all offer secure credit cards.
With a secure credit card account, your credit limit equals a deposit you’ve made, and you’re responsible for keeping your spending within that limit and making monthly payments on time. The card issuer reports these payments to the credit bureaus, and some of the more secure cards include a built-in ‘ramp’ to switch you to an unsecured credit card after a set period of time, provided that you do not fall behind. Payments.
While the quality of secured credit cards has improved in recent years, there are still offers that charge a high annual fee and do not report your activity to the credit bureaus (that’s the whole point). Read the disclaimers and the fine print of the credit card issuer and make sure you are aware of any annual fees – which come from your deposit and reduce your available credit – before signing up .
If you have a credit history, but not a lot, you can also try getting a retail credit card as your first credit card. Store cards generally have lower credit limits and higher interest rates, but they are also more readily available to borrowers with lower credit scores. (Just watch out for interest and late penalties, both of which can be high.)
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How Becoming an Authorized User Can Help Create Credit
If someone with established good credit adds your name to a credit card account as an authorized user, it can help increase your credit. This is often the number of students who begin to build up credit, if a parent adds them to a credit card that they can use during their studies, for example. Become an authorized user is not the same as having a co-signer or joint account, as the primary cardholder retains the right to remove you from the card.
While most of the other credit creation steps that you can take on your own and described here can no longer create your own credit history, a great benefit of being added as an authorized user is that the cardholder principal almost certainly has more credit history, and the length of your credit history is a component of a credit score.
It should also be in addition to other credit creation initiatives, not a substitute for them, says Gondofi. “It’s a tool, but what’s more important are lines of credit in your name,” he says.
The big caveat to accessing an account as an authorized user is that you must have a family member or someone else with a good credit history who is willing to add you. It’s a serious matter of trust: if an authorized user accumulates a bunch of fees, the primary cardholder will be forced to pay them. Conversely, if that person falls behind in their payments or uses their card to the fullest, the authorized user’s credit rating may be affected rather than being helped.
How Using Alternative Data Can Help Build Credit
In its quest to expand access to credit, the credit reporting industry has turned to other types of financial activity that are generally not included in traditional credit scoring models, but which can still be useful in assessing the level of financial diligence of a potential borrower.
If this is your first time trying to get credit, Experian Boost or UltraFICO are two fairly new tools that integrate different types of activity. Experian Boost, a free service launched by Experian in 2019, can record positive payment activity such as cell phone, utility, and rent payments on your record. These payments are not included in typical credit rating calculations, but are another way for a potential lender to assess your creditworthiness. On average, Experian claims that users see a 13 point increase in their credit score. Also launched in 2019, UltraFICO includes a user’s current account bank account activity to give lenders a more in-depth view of borrowers with a “lightweight file.”
“These types of tools are very useful because they include data sources that aren’t typically found on a traditional credit card,” says Duguay. “This is data that is not normally included in a traditional credit report.”