There is a lot of outdated crap on the internet about how to build credit when you don’t have any and I’m tired of hearing the same stuff over and over.
I’m going to tell you the best way to build credit. It’s actually pretty easy if you follow these steps. These techniques also work if you’re trying to rebuild credit and improve your overall credit score.
How To Build Credit
Forget About Co-signers And Authorized Users
Back in the day, you remember, trying to get approved for credit in your college years, you used to be able to build credit by becoming an authorized user on your parent’s credit card or having them co-sign on a car for you.
While you can still do this, it’s not going to help build your credit much. Your credit score is no longer affected very much by this.
Nonetheless, you still hear countless people tell you that’s the first thing you should do. They aren’t lying to you, their info is just outdated. That’s OK 🙂
This happened fairly recently… a couple of years ago.
Don’t Apply For A Major Credit Card Yet
Chances are, if you don’t have any credit history, you’re not going to be accepted for a major credit card like American Express, Discover, Chase, Citi, etc.
The thing is, when you apply, however, you’ll suddenly have credit history –history showing that you applied for a credit card. This is called an “inquiry” and multiple inquiries lower your credit score.
Now, sometimes one of the major credit card companies will send you a pre-approval offer even if you don’t have any credit, and the truth is, you might get accepted.
However, I wouldn’t recommend going this route. There are a few reasons why that I’ll get into in a sec.
Main Point: hold off on applying for that shiny new American Express card.
Start With A Secured Card
Think of a secured card as a debit card that builds a credit history. In other words, you aren’t actually getting a line of credit –you have to “secure” the card, you have to deposit the money like a debit card.
However, unlike a debit card, every month it gets reported to the credit bureaus. There are several reasons why this is a great way to build credit.
First, you can’t get yourself in too much trouble. When you have an American Express card with a $5k credit limit on it, you have to be really careful and responsible with it. That’s why they don’t just hand them out to anyone. You have to prove yourself. I know it’s easy to say, “Oh I’d be responsible with it, I’m not an idiot.”, and I’m not saying you are, but it’s very easy to get into trouble unless you have experience with credit.
Another reason why a secured card is great for building (and rebuilding) credit is that you can get one with a relatively small deposit minimum. Many secured cards have deposit minimums as low as $200.
Lastly, it should be noted that most of these cards have an annual fee. That’s just something you’re going to have to deal with for a year or so. It’s a small price to pay for good credit. Trust me, because not having any credit can cost you thousands in the long run.
Credit Builder Loans
Anyone that is trying to establish or rebuild credit after bankruptcy may want to consider a credit builder loan.
Though, this type of loan can help people trying to build credit for the first time in their lives.
College graduates, newly divorced or immigrants new to the country could all benefit from a small credit builder loan to get them rolling.
For example, college grads, who don’t have credit cards can use a credit builder loan to establish a great credit history and in turn have an easier time renting an apartment or getting a cell phone plan in their name finally.
These types of first-time borrowers will likely see a bigger boost in their credit score than someone who’s rebuilding their credit.
You Need To Have Perfect Payment History
Once you get your secured card, make sure you pay it every month. Don’t mess this up! Also, don’t make the mistake of not using the card.
You need to use the card in order to show that you can responsibly use credit. Remember, that’s the goal here. With that said, you don’t have to use it for every purchase you make.
You can simply use it a few times every month. For example, using your secured card for gas purchases is a great way to go about this.
You will need to build your credit history with this card for about 6 months to a year. So, unfortunately, it does take a while to build credit, but there is no way around this.
Don’t believe people/websites that claim you can do it faster –you can’t. These people aren’t smarter than the folks at FICO. They are liars and crooks.
Now It’s Time For The Big Leagues
Now that you’ve had your secured card for a year or so and it has perfect payment history, you’re ready to apply for a major credit card.
You have many options but don’t expect to receive a huge credit limit. That’s OK! You’ve made progress and you should be proud of yourself.
Having a major credit card on your credit report is great for your credit score (unless you pay late).
In other words, major credit cards are “worth” more than charge cards or secured cards when it comes to your credit score.
Keep On Making Payments On Time
You’ve got some great experience handling credit with your secured card over the past year so pass those good behaviors over to your new major credit card.
Credit cards can be great if you use them wisely. That’s one of the reason why I said I don’t recommend getting a major credit card in the beginning. You need to slowly move towards it.
Then you’ll “get it”, and everything will be great.
I wish you all the best luck and let me know how it works out!
Also, if any of you want to share your experiences, please do so below!