How to Build Credit from Scratch
When you’re faced with the situation of having no credit, you might be surprised at how creditors treat you. It can often feel like you’ve been lumped into the same group as people with bad credit. This is because creditors use your past credit history to determine whether you are or will be a responsible borrower. If you have no past history, there’s no pattern to establish your credit worthiness.
This wouldn’t be a significant issue if it weren’t for the fact that credit has become such an integral part of our society. Employers use it when looking for potential hires, auto insurance companies use it to determine rates, not to mention the savings a high credit score can bring you in interest rates alone. The problem is that you need credit in order to have credit. Luckily, there are a few steps you can take to get you on the right track towards building credit and achieving a high credit score.
Get a secured credit card.
Secured credit cards work the same way as regular credit cards, except they require a deposit. The amount you are allowed to borrow usually reflects the exact amount of the deposit you paid or a percentage of that deposit. One common misconception regarding secured cards, however, is that they work like debit cards. This is not true. The creditor only uses your deposit as a guarantee in the event of non-payment. When you make a charge on your card, you need to pay that amount back just like a normal credit card. The payment will not be taken out of your deposit. There are a number of secured credit cards to choose from.
Only charge what you KNOW you can pay off in FULL each month.
Now that you have a card, you need to show that you are a responsible borrower. To do this, you need to make sure that you only charge what you absolutely know you can pay off each month. If you pay off your balance in full each month, you’ll avoid interest rates.
As much as the temptation exists to spend your newfound access to money on something splurge-worthy, the best use for your credit card money is to pay something you’ve already budgeted for each month. Some ideas include gym memberships, subscription services and other routine purchases.
Keep your balance under 30%.
A very little known fact is what we like to call the 30% rule or your utilization rate. When your overall balance goes over 30% of your credit limit, your credit score is negatively affected. That means if your credit limit is $500, your balance should never go over $150. In fact, it’s wise to keep it even lower because many credit card companies actual report lower credit limits than what you actually have, therefore increasing your percentage.
Pay your bills on time, EVERY month.
There’s no need to fall into the trap of creating more debt. To avoid unnecessary interest rates and dips in your credit report, make sure you pay your bills on time every single month. To make sure you’re covered, we recommend setting up automated payments. That way no matter what is going on in your life, your credit score isn’t going to suffer from forgetfulness.
Monitor your credit report.
The point of building your credit is to get a high score, so it makes sense to keep an eye on that statistic. 80% of all credit reports have errors, making it even more crucial to stay on top of things. Don’t fall victim to the free credit report sites either. When you need to get your credit report, make sure it’s giving you your FICO score.
Apply for an unsecured card after about a year.
Once you’ve had a good amount of time with good credit payment history you should be eligible to receive an unsecured credit card. Call your creditor to see if you qualify for a move from an unsecured account to a secured account. Unsecured cards carry many benefits such as higher limits and reward perks. Just keep in mind the same tips when using your credit card.
Building credit can be a slow process that requires a lot of patience. However, like most things, it will be worth the wait whenever you need to make a large purchase or an emergency situation arises.