If you are just starting out in your ‘adult life’ or you just never got around to establishing credit, you have a lot of work to do. It’s kind of like an oxymoron that you need credit to get credit, but unfortunately, it’s true. So just how do you get started building your credit from scratch? We help you understand the process below.
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Get a Secured Credit Card
The easiest way to get started when you don’t have any credit is to apply for a secured credit card. As the name suggests, the card is secured by your deposit. The amount you put down on the card is your credit line. You can then use the credit line as you would with any other credit card. You charge things and pay your bill each month. As you pay the credit line off, you are able to reuse the credit line to charge more in the future.
The security deposit only comes into play if you miss a payment. If you default, the credit card company will use your security deposit to pay the bill. You won’t keep this credit card forever; it’s just meant to help you build credit. As long as you use the card and pay it off in full, you won’t have anything to lose. Keep in mind that each secured credit card has different terms, including the annual fee, so make sure you shop around to find the one that is best for you.
Be an Authorized User
Do you have a family member or very close friend that will let you be an authorized user on their credit card? Before you agree to take this step, make sure you ask the credit card company if they report authorized users to the credit bureaus. If they don’t, it won’t’ help you build credit to be on their credit card. If they do, you stand to benefit.
Of course, being on someone else’s credit card can be tricky territory. Make sure you have an agreement upfront as to how the credit card should be used and/or paid for when there is a balance. If you don’t discuss the details upfront, you could end up ruining a relationship down the road if you do something that your family member or friend didn’t approve of with their credit card.
Ask Someone to Cosign a Credit Card or Loan
If you have someone close to you that has good credit and decent income, ask them to be a cosigner on your credit card or loan. This gives the lender a better feeling if there is someone on the debt that has established credit that has a decent history.
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The cosigner should understand that they are liable for the debt should you default, though. Make sure you are properly equipped to manage the debt you are about to take on so that you don’t default. If you do, the lender can go after the cosigner and the default could also hurt their credit. It also won’t help you build your credit if you default on a loan.
Apply for a Standard Credit Card
Once you build some credit, go ahead and apply for a standard credit card. Some people start with a department store credit card since they are easier to obtain. Either way, once you get the card – use it. Don’t max it out, though. Instead, try to keep your balance at about 30% of the credit line. This way you get good credit utilization scores, which helps your overall credit score.
You should do what you can to pay the balance off in full each month. If you can’t, at the very least, make the minimum payment on or before the due date. This way you don’t risk having a late payment reporting on your credit report, as that can really bring your credit score down. If you make your payments on time and use the card regularly, though, it can help build up your credit.
Don’t Close Old Accounts
With the exception of the secured credit card, try to keep all of your accounts open. This will help your credit’s age, which is a factor in your credit score. The older your credit is, the better your credit score will get over time.
If you do have accounts you want to close because of the annual fee or negative terms, make sure you have other ‘older accounts’ to offset it. Closing just one account can really affect your credit’s average age, which can negatively affect your credit score.
Building credit from scratch takes work and time. You have to be consistent and patient at the same time. As you have more positive accounts reporting on your credit report, you’ll build credit and get yourself a decent credit score. Your ultimate goal should be to get a credit score over 700 as that is the point that lenders consider your credit ‘excellent’ and will give you the loans you need.
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