For many people who’ve experienced financial issue getting credit in order to build your credit back up can become a huge issue. If you’re in this situation, don’t worry, there are still a few good options for you. One of these options that we recommend for fixing your bad credit is opening up secured credit card accounts.
What exactly is a secured credit card? A secured credit card is just like a regular credit card, but with one major difference. Your credit limit is secured with a cash deposit that the company will use if you default on your payments. It is important to understand that having a secured credit card does not mean you don’t have to pay your bill every month. These are not pre-paid debit cards where you spend the money that is in the account. They act exactly like regular credit cards where you are charged interest on your balance and late fees if you don’t make your payments every month!
Now, this might seem like a bad deal to the consumer, however, in order to help you build a good credit score your debtor needs to make sure they are covered in case history repeats itself. Here’s a look at exactly how they work:
- You choose a credit limit and make a deposit to secure that credit limit.
- The credit card company will issue you a credit card with that pre-set credit limit.
- You make purchases and payments just like you would with a regular card.
- After you have built a good credit history, you can request that card be converted to an unsecured card and to have your deposit refunded.
Also, if you decide that you do not wish to have that credit card anymore and close the account, the card company will refund your deposit, after any balance owing has been paid of course.
Why should you get a secured card?
There are two main reasons: First, if you don’t qualify for an unsecured card, they are fantastic ways to build your credit score… as long as you get the right card. The second reason you should get a secured credit card is that there are a lot of businesses that will not let you use their services if you do not have a credit card. Most car rental companies, for example, will not rent a car to you if you do not have a major credit card. For them, the fact that you have a credit card means that you are less of a risk when it comes to letting you loose in their car.
A few words about using your card…
There’s more to credit than just having a credit card. In fact, in order to build your credit, you will need to have between three and five credit cards. You’ll also need to make sure your balance never goes over 30% of your credit limit, even if you pay off the entire balance every month. Using just 30% of your credit limit shows the banks that you are responsible with your credit and are able to live within your means.
What do you think is better? Having only one credit card that is near it’s credit limit that you pay in full each month or three to five credit cards with low balances that you pay off each month? If you picked the first option, you might be surprised to find out how harmful having a high credit balance actually is to your credit score.
Why would you want MORE credit cards with lower limits?
The proportion of debt that you carry on credit card to your credit limit is called a “utilization rate.” Credit bureaus look at this ratio as a factor in determining your credit score. The lower your utilization rate, the better your score. An ideal utilization rate is anything below 30%. We call this the 30% rule. That means that you only want to have credit balances that make up less than 30% of your actual credit limit. For example if your credit limit is $1000, your credit balance should never exceed $300.
What about if you pay your bills on time each month?
Credit bureaus are looking to see if you live within your means and use this 30% rule as measurement. Paying your bills on time shows you’re responsible for your debt, however it doesn’t reflect your lifestyle choices as well as the 30% rule does. That means you should NEVER let your balance exceed the 30% marker.
What about if you don’t have a preset limit?
In some cases, such as with American Express, you may not have a spending limit. In these situations the credit bureau will take the highest balance you ever had on your credit card use that amount as your default balance. If you’re highest balance was $8,000 that would mean your balance should never exceed $2400.
What should you do if you currently exceed the 30% rule?
The first option is to pay off any debt until your balance is under 30% of your credit limit. If this is not an option for you, you can transfer your debts between cards to keep them under 30%. In addition, you can try asking your credit card company for an increased balance. Just make sure to check they are reporting the new credit balance on your credit report or you may find yourself over the 30% limit.
Lastly, if you have less than 5 credit cards, you can try opening a new credit card to help move the balances around.
Credit is a tricky subject. Everyone thinks they know the right thing to do, and everyone seems to be an expert. The fact is, there are a lot of myths and untruths about the way your credit score is compiled. The biggest and first mistake most people fall for is believing that no or little credit equates to good credit. This couldn’t be further from the truth.
Imagine someone you didn’t know came up to you and asked if they could borrow money from you. They promised they’d pay it back to you in a week. How would you know they were responsible or even ethical enough to return your investment? Now, let’s say a trusted friend you’ve known for years came up to you and asked you for the same favor. Your response would more than likely be quite different than the one you had towards the unknown person.
When you have little or no credit, credit bureaus view you as the stranger asking for money. They have very little information on whether you are a good investment and whether they are likely to see a return. You have to become like the trusted friend and create credit history to have a valued and trusting relationship.
This doesn’t mean go out and apply for multiple credit cards and start taking out loans. While you need to show credit history, you also don’t need to go into debt. To create a good credit score, you need at least three credit cards with balances below 30% of your credit limit and an installment loan.
Now, you may be thinking that credit isn’t really a big of deal and you don’t want to have credit cards and loans because they are a hassle. This way of thinking can hurt you financially more than you know. Your credit score is used to determine a number of things including, believe it or not, your automobile insurance and even your job worthiness.
When it comes to purchasing a house, your interest rate is determined by your credit score. This means you could be paying thousands more for your home because of bad credit decisions. Think about this:
On a $300,000, 30-year fixed rate mortgage, a person with poor credit (below 620) would pay $589 more a month than a borrower with a 720 credit score. That’s $589 a month! Imagine what you could do with an extra $7,068 a year. You could buy a new car, save for your child’s college tuition or with wise investments, double, triple, or even quadruple the money!
The bottom line is, your credit score can either help or hurt you financially. Learning the ins and outs of how to maintain a high credit score will give you a great return on your investment of time and research. It may even help you live the life you dream without overextending yourself.
It can seem so easy – get a 250GB Compaq laptop, a 42-inch JVC 1080p LCD flat panel TV and two HP wireless TV connect adapters for only $129.99 per month! How about a full 15-piece living room and dining set for only $119.99 per month? You could get a sofa, loveseat, coffee table, two end tables, a matching rug, a dining room table and six chairs. Best of all, there are no credit checks and they’ll even throw in free delivery and set up!
There are ads like these every week in your Sunday paper. The rent-to-own industry has grown into a multi-billion dollar industry since its start in the 1960s. Targeting low-income consumers, rent-to-own stores make it possible to have the nice things that other people have, without the credit restrictions. If you don’t have a good credit rating, where else are you going to be able to get that big screen high definition TV for your Superbowl party?
The problem is that rent-to-own stores take advantage of the current credit climate and charge the equivalent of 80% to 160% interest rates per year! In the example above, the laptop, TV and HP wireless TV connect would cost me $1949.99 to purchase from my local rent-to-own store. However, if you did not have two grand to spend right now, but you wanted the TV for the Superbowl, you could pay them $129.99 for 24 months and own it that way.
Well, let’s do the math shall we? $129.99 for 24 months equals a total price of $3119.76. That is an interest rate of 80% per year!
Now, that is at the store’s advertised prices. They are the ones that said the equipment was worth $1949.99. So, looking at their specifications, we did a little online comparison-shopping at Amazon.
An equivalent 40″ Philips 1080p LCD flat panel TV at Amazon is $672.71 plus $31.99 shipping.
The HP Wireless TV Connect is $152.86 with free shipping
The Compaq Presario CQ61-420US 15.6-Inch Laptop (which has similar specifications to the one advertised at Aaron’s) is $549.95 with $8.99 shipping.
GRAND TOTAL: $1,375.52 plus shipping.
So the rent-to-own store is charging $574.47 more than you would pay on Amazon. When you add that overcharge into the equation, you get an equivalent interest rate of 113.4% per year!
Right now, the average consumer credit card interest rate in the USA is 15.32% annually. If you were to make that purchase on a credit card it would cost you $67 per month to pay off the balance in two years. That is a total charge of $1608, of which only $233 is interest. That is a total cost of ownership that is almost $350 cheaper than the Aaron’s “Every Day Low Price” of $1949.99!
Unfortunately, the exorbitant cost of ownership is only one of the problems with rent-to-own stores. These stores do nothing to build credit. As you are not technically buying from them, they are not technically extending credit to you. Therefore, there are no reports of your good payment history to the credit bureaus and your credit score will not improve.
Another problem is that it does not matter how many payments you have made, you don’t own the items until you complete the entire term of the lease. So, lets say you have made 20 payments at $129.99 and you miss a payment. As you don’t own the items, the rent-to-own companies have every right to ask for them back. It does not matter to them that you have paid $2599.80 for items you could have purchased for $1375. If you stop paying, they will come and take it all away. In fact, only 25% of people that “purchase” from a rent-to-own store actually end up owning the things they buy. That means 75% of their customers make monthly payments on items and then end up giving them back. What does the store do with the stuff they get back? They “rent” it to the next customer!
That’s right! If you think you are going to get a brand new TV or washing machine, think again. With a 75% return rate, the chances are incredibly high that the products you get are used. Because you are renting these items, the companies do not have to tell you how many times these items have been rented before. The TV you get could have had two previous “owners” and the store might have already received over $1,600 for the product. Then they turn around and rent it to you for another $3,400 over two years and, if you complete the lease and actually end up owning it, they have received over $5,000 for something that you could have purchased for as little as $1375!
The profits to be made in this business are astronomical… and these companies love the current credit scoring system. Over 25% of Americans have a credit score of less than 600 and would not be able to get a credit card to buy the things they want. As long as that situation continues to exist, these companies will have a dedicated market. So, don’t fall victim to the rent-to-own scam and start building a great credit score today.
Credit cards have gotten a bad reputation as more and more people view these cards as vessels for temporary financial freedom. The thought of being able to buy whatever you want even if you don’t have the cash readily available is exhilarating. As times have gotten harder and more and more people are relying on credit to help them through, retail therapy has become a quick emotional fix. Unfortunately, if you don’t know how your spending habits hurt or help your credit, you could be paying for more than a quick dose of endorphins.
While credit cards certainly provide access to splurge on these instincts, that doesn’t mean they are all bad. In fact, it’s actually important to maintain three credit cards in order to improve your credit score. This may sound confusing, but your credit card history is a crucial factor in determining your overall credit score. As with many things, there are some points to watch out for. When using credit cards, you’ll want to keep these tips in consideration:
- Always remember the 30/30 rule. 30 percent of your credit score is based on your outstanding debt, and if your credit balance is more than 30 percent of your credit limit, your score is going to drop. Never exceed 30% of your limit.
- Make sure your credit card companies are reporting your actual credit limit. If they are reporting a lower credit limit, then your calculation for 30% of your credit debt is going to be reported incorrectly, therefore damaging your score.
- Be aware of the credit balance myth. Some people believe that they must keep an ongoing balance on their credit card in order to improve their credit score. This mistaken belief causes some consumers to make unnecessary interest payments. The truth of the matter is that credit bureaus have no way of knowing whether you pay your balance in full or make monthly payments. If you have the financial resources to do so, pay your balance each month. That said, keep your cards active. If you never use your credit card, it will become inactive and stop helping your credit score.
So if you need the credit cards, but credit card debt is also damaging, the question then remains: What exactly should you be spending your money on? How can you use your credit cards to build good credit?
To keep things in perspective, consider the following statement: wealth is creating a state of abundance. If you are using credit cards to pay for something, not only are you paying for the item, but you’re paying extra for the right to “pay later.” So instead of moving forward financially, you’re actually creating more debt. With this in mind, it’s important to examine exactly what you are using your credit cards for. Buying a shirt or even a tank of gas for your car at an inflated rate doesn’t really make any sense when you factor in interest. However, purchasing a book on finances or taking a course that will teach you a skill you can monetize will be well worth the extra interest you incurred.
Therefore, credit cards should be used to increase your quality of life or your wealth, not used as a means to create more debt. The next time you’re about to charge something, consider whether that purchase is going to create a state of abundance or create a state of debt. This type of control will not only help you improve your credit rating, but it will also help you make better long-term financial decisions.
We live in a credit-driven society. You need credit for just about everything from buying a house to even getting a job. With so much importance put on using credit as currency, it’s really no surprise that so many Americans are swimming in debt. There are 22 different criteria for determining credit score, but unfortunately, the only ones who know the actual formulas are the credit bureaus themselves.With so little information on how to rebuild credit, people often make common mistakes that seem like the right choice, but in the end actually hurt your credit score even more.
If you’re in a situation where you need or would like to increase your credit score, you’ll want to try the following five actions you can take right now to get you started on the right path. Prior to doing any of these steps, however, you need to make sure you know where you stand. Odds are you wouldn’t build a house without a blueprint. In the same vein, you wouldn’t want to try to make changes to your credit if you don’t know exactly what needs fixing. Therefore, before starting these steps you’ll want to get your credit report.
Quick Fix #1: Check for Errors
One of the most common sources of a bad credit score can be attributed to reporting errors. The first thing to check, after any obvious errors, is to make sure your credit limits are being reported correctly. Your credit score is affected by your utilization rate, which is based on the percentage of your credit limit you use each month. If your credit limit is not being reported correctly, your utilization rate will be off and can significantly harm your score.
The other main error to check for is duplicated notices on a single collection account reported as active. Often a collection account will be transferred to more than one collection agency to be handled. There’s no real issue with this fact, and all of the collection agencies might be listed on your credit report. That’s normal, and all but the agency currently trying to collect the debt should be listed as transferred. But if more than one collection agency is reporting the collection account to the credit bureaus as active, you have a problem. If this happens, the one collection account is reported as two separate accounts and therefore contributes to a lower score.
Quick Fix #2: Start Reducing Credit Card Debt
This fix should seem like a no brainer, but it’s often overlooked because it’s never really explained why the amount of your credit card debt is so significant. We like to call this tip the 30/30 rule. 30 percent of your credit score is based on your outstanding debt, and if your credit balance is more than 30 percent of your credit limit, your score is going to drop. If you’ve racked up over 30 percent of your limit in debt and you’re only paying the minimum monthly payment each month, you’re score is going to drop – regardless of how “on time” you were each month. With this information in mind, it’s imperative to reduce your credit card debt as much as possible to maintain the 30/30 rule.
Quick Fix #3: No Credit = Bad Credit
Credit scores are created based on information from your credit history. If don’t have any credit history, there’s nothing to base your score off of. This isn’t a case of being innocent before proven guilty. When it comes to lending money, there aren’t many resources that are going to hand over a wad of cash if they don’t know whether you are a good investment or not. Think of it this way: Let’s say you needed heart surgery, and you met a guy who said he was the best heart surgeon in the world. He might be the best heart surgeon in the world, but if he had no credentials and no references, there’s no way you’d ever let him open up your chest. Likewise, you’d never let a guy who lost his medical license open up your chest.
The credit scoring bureaus think of you in the same terms. If you don’t have credentials, they consider you high risk. You have to give them information by which to judge you. To be sure you’re giving them enough information to properly judge your risk, you should have three to five credit cards and an installment loan.
Quick Fix #4: Authorized Users
If you’re in a situation where you either don’t have a lot of credit, or have fairly bad credit, you may want to explore getting added as an authorized user. As an authorized user, you get added to a relative’s (preferably one with the same address) credit account. This allows you to piggy-back on their good credit standing and reap the benefits. This only works, however, if the credit card company reports your status as an authorized user to the credit bureaus and if the outstanding debt on the card never exceeds 30 percent of the credit limit. Keep in mind, that while this is a great way to improve your score, if the account falls into poor standing your score will also be affected negatively.
Quick Fix #5: Use Credit!
It’s a natural reaction for someone to want to steer clear from something that has caused them harm in the past. In fact, it seems to make sense rationally that if you are having credit issues, you probably wouldn’t want to keep using credit. Unfortunately, this way of thinking couldn’t be further from the truth. For more information on why this is so important, check out the free ebook Credit After Bankruptcy & Foreclosure. You may not be experiencing these particular financial crises; however, the information is still valid for anyone looking to repair bad credit.
Question: What is the fastest way to build credit? I am applying for a business loan, and I need to bump my score up by about 60 points.
Answer: There are a lot of reasons you might want to raise your credit score, and raise it fast. In today’s environment, you might not qualify for a loan if your credit score is not at least 720. About 60 percent of employers run credit checks on potential employees. Landlords won’t rent to people with bad credit. You will pay more in interest if you have bad credit. The list goes on and on …
Fortunately, if you want to learn how to build credit fast, I have a great trick. This works best for married people, but single folks can use it as well. Let’s start by assuming you are married. Later, I will explain how to modify this example if you are single.
The Fastest Way to Build Credit: A Tip for Married People
To build your credit fast, transfer as much of your credit card debt into your spouse’s name. To do this, simply have your spouse “buy” your debt by paying your balance(s) with his or her credit card(s). Assuming you both have individual credit cards, this will cause your score to jump quickly.
You see, the credit-scoring bureaus place a lot of weight on something called a utilization rate. Each of your credit cards has a utilization rate, which is a number that describe how much of your limit you are utilizing. For instance, if a credit card has a $1000 limit and you have a $100 balance, you are utilizing 10 percent of your limit. Your utilization rate, therefore, is 10 percent.
Credit-scoring bureaus respond best if your utilization rate is below 30 percent, so if you want to learn how to fix credit, you should always lower your utilization rate.
Start by transferring balances to your spouse’s credit cards. Of course, this might lower your spouse’s credit score, but you will buy the debt back (thereby increasing your spouse’s score) once you have qualified for the loan.
In short, you will have better loan terms, and your spouse’s score will be lowered only temporarily.
The Fastest Way to Build Credit: A Tip for Single People
If you are single and also want to know the fastest way to build credit, you can modify this tip and use the same strategy with a family member or a loved one. However, be sure to put some structures in place so that your family member/loved one is protected. For instance, you might want to structure a proper contract by hiring a lawyer or using an online service such as Virgin Money. You might also give your family member/loved one collateral. Is your car paid off? Do you have an expensive piece of jewelry? One way or another, be sure that you never jeopardize family relationships just to raise your credit score!
And be sure to download our free ebooks about how to secure home and car loans during this tight lending environment.
One of the first pieces of advice I give to people who have suffered severe financial crises and want to learn how to build credit is to become authorized users on credit cards. Authorized users are allowed to use credit cards but have no contractual obligation to pay the bills.
For this reason, a person does not need to have a high credit score to qualify for authorized user status on a credit card. However, the credit card’s history will often be reported on the authorized user’s credit report, so long as the authorized user is related to the account holder.
Becoming an authorized user on a family member’s credit card will quickly raise your credit score (even after bankruptcy or other financial disaster) by allowing you to “borrow” the account holder’s clean credit history.
However, the account holder—fearful that you will rack up huge charges you cannot or will not repay—might be reluctant to add your name to his or her account. Let the account holder know that she or he can be protected.
- First, the account holder should shred the credit card that arrives for you.
- Second, the account holder should never give you the account number, credit card expiration date, or card security code.
In this way, your credit score will increase while still protecting the account holder from any irresponsible behavior on your part.
Authorized users should also protect themselves by choosing the account wisely. Only authorized users who are related to the account holders will see their bad credit scores benefit from this strategy. Therefore, be sure you choose an account holder who is also a relative. Try to choose someone with the same last name and address. Otherwise, the credit-scoring bureaus might not recognize your status as an authorized user, and your credit score might not improve.
To make sure that the credit card company is reporting your status as an authorized user, call them and ask. You can also check your credit report to see if the account is appearing. If not, choose another account holder.
Be sure that you also choose a responsible relative with an account in good standing. If you become an authorized user on an account that becomes delinquent, guess what happens? Your score will drop. As such, be sure to pick an account with a clean history of payments. Be sure, too, that the balance on the card stays low—preferably about 30 percent of the limit. If the balance exceeds 30 percent, or if the account holder makes a late payment, you should immediately remove your name as an authorized user so the negative information does not hurt your credit score.
Authorized users usually see a quick jump in their score. After twelve or eighteen months, you might be able to remove yourself from the account and qualify for loans on your own.
How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 3
I’m excited about this week’s update to my eight-part series—How to Build Credit Before You Buy a Home or Make Another Major Purchase! Today’s lesson in how to build credit comes straight from Step Two of my book, 7 Steps to a 720 Credit Score. Step Two is: Have at least three revolving credit lines.
Credit bureaus give higher scores to people with three to five revolving credit card accounts, which include major credit cards such as Visa, MasterCard, American Express, and Discover, as well as store-specific retail cards, such as a Macy’s card, Chevron card, Gap card, etc. If you do not have at least three active credit cards, you should open some.
But, there’s a caveat: Open three major revolving credit cards, not three retail credit cards. If you have retail credit cards, be sure to read my article entitled, “Retail Credit Cards.” In short, this article explains that:
- Retail credit cards are not the best credit cards to help you along your path to learn how to build credit. Credit-scoring bureaus respond most favorably when people have three to five credit cards, so why waste one of them on a card that can be used only at specific stores.
- These credit cards often end up costing you more than you will save with the one-time discount you might receive when you open the account.
One thing to keep in mind when opening new credit cards and learning how to build credit: You credit score will initially take a hit when you open a credit card. The credit-scoring bureaus use a formula to calculate credit scores, and 10 percent of this formula considers inquiries by lenders into your credit score. Anytime you apply for a credit card, the credit card company will make an inquiry into your credit score, so your credit score will drop a bit at first. Don’t worry! Just know that in six months, your credit score will start to rebound, so long as you keep the balance below 30 percent and pay your bills on time. For this reason, if you have to open more than one card, open them all at once. Don’t prolong the agony! If you open one now, and another in six months, you will have to wait a year before your score starts to build. If you open them both now, your credit score will start to climb within six months (so long as you implement all the other steps).
If you have poor credit, you might not be able to open a typical credit card. In this case, consider opening a secured credit card. Lenders that offer secured credit cards will require you to make a deposit that is equal to or more than your limit, thereby guaranteeing the bank that you will repay the loan. If you do not make your monthly payment, the deposit is applied toward your balance.
Another option for borrowers with poor credit is to be added as an authorized user to an existing account in good standing. Authorized user accounts help you borrow a family member’s positive credit history while you learn how to build credit on your own.
If you have more than five credit card accounts, do not close the accounts. Most credit experts agree that once you have opened the excess accounts, the damage is done. In fact, closing them might hurt your score and will never help you if you want to learn how to build credit. If you have more than five credit cards, we sure to read the blog called “Closing Credit Card Accounts” so that you know exactly what to do if you have more than five credit cards.
Be sure to come back next week for the fourth blog post of my eight-part series: How to Build Credit Before You Buy a Home or Make Another Major Purchase. And, don’t forget to register for my free teleseminar that teaches you how to negotiate with banks for lower interest rates.
People regularly ask me for tips on how to build credit fast. Among the usual—paying down credit card limits and becoming authorized users—I tell spouses to leverage each other’s credit scores.
For a variety of reasons, you might need to learn how to build credit fast. Maybe you are applying for a loan and want to secure lower interest rates. Perhaps you are a candidate for a job at a company that runs a credit check before hiring new employees. (After all, 60 percent of companies run a credit check at least some of the time.)
If you have a balance that exceeds 30 percent of the limit on a credit card, you can transfer a portion or the entire balance to your spouse’s credit card.
This is among my favorite tips for how to build credit fast because it makes a huge difference. With the credit scoring systems calculating outstanding debt as 30 percent of your credit score, your score will quickly increase if you lower your outstanding debt. You can then walk into the loan application or job interview with low personal debt and a higher-than-usual credit score.
Though you might lower your spouse’s credit score, you can quickly “buy back” the debt using your credit cards once you secure the loan or job. Of course, you will need to repay the favor if your spouse ever needs tricks for how to build credit fast!