How to Build Credit
When building credit, you have to first start by getting credit. Sometimes it comes to you via unsolicited credit card offers, and sometimes it’s not so easy to figure out. Many times, it needs to be built from nothing, primarily because lenders are hesitant to offer credit to someone with no credit history. No worries, though, because you can start with a secured credit card, which uses your money deposit as collateral for the credit.
Secured cards work similar to standard credit cards when you start using them; generally, the naked eye can’t tell the difference. You can also consider starting with a retail store credit card, like Target, Macy’s, J.C Penny etc. They are usually pretty easy to get and will generally start you off with a small credit limit. If you decide on a retail store card, I caution you to not overuse it because the rate is generally pretty high, sometimes as much as 26.99 percent. Once you obtain a standard card with a lower rate, I encourage you to dump the retail card for good, regardless of all their flashy offers.
Another way to obtain credit is to become an authorized user. This is pretty much the flavor of the month, gaining a lot of speed now, because it’s widely used as a credit repair tool these days. On this you also need to proceed with caution because you’ll basically be listed as a user on someone else’s credit card. There has to be a lot of trust on both sides, because if either overuses or misses payments, both scores will go down. In my many years in finance, I’d say this was best used in a parent/child situation. If a parent has good credit, it’s a great start for their child because when the child fully enters financial society, they start with established credit and a pre-made good score.
Perhaps the oldest way to get started is with a co-signer, having someone else sign on the credit obligation with you. In that case, you’re both responsible for timely payments, and similar to being an authorized user, both scores are affected.
At the risk of stating the obvious, once you’ve obtained credit, it is essential to make your payments on time. Payment history is the biggest factor in determining your credit score. The more on time payments you have, the more your credit score will improve. It’s a good idea to start with no more than one or two credit cards and be careful how much you spend. If I had a dollar for every young person on the other side of my desk explaining how they over spent when they were younger and are still paying the price many years later, I’d have a wheel barrel full of money. In other words, overspending is common; it’s a good time not to be common. Never make minimum payments. When it comes to your financial health, minimum payments on your credit card are poison. A $2000 credit balance with an 18% annual rate, with a minimum payment of 2% of the balance, or $10 dollars, whichever is greater, would take 370 months or just over 30 years to pay off. Another good thing to be aware of: routinely check your credit; it helps to spot inaccuracies, which will allow you to more effectively dispute them and guard against identity theft.
Now that we’ve covered much of the basics, let’s tackle a couple of cool and legitimate ways of jumping your score 30 to 90 points in 45 days if you are fairly established and currently not in a distressed credit status. You can improve your credit utilization and raise your limits.
Let’s say you have two credit cards. Card A has a $6,000 credit limit and a $2,500 balance. Card B has a $10,000 limit and you have a $1,000 balance on it. This is your utilization ration per card: Card A =42% (2500/6000=.416, or 42%), which is too high. Card B=10% (1,000/10,000=.100, or 10%), which is excellent. In this scenario your overall credit utilization ratio is good.
Next, get your credit limits raised. All you have to do is call your credit card company and ask for an increase to your credit limit. Have an amount in mind before you call. Make that amount a little higher than what you want in case they feel the need to negotiate. Remember the example in #1 Card A has a $6,000 limit, and you have a $2,500 balance on it. That’s a 42% utilization ratio. If your limit goes up to $8,500, then your new ratio is a more pleasing 29%. Remember you were already at 10% on your other card. Congratulations your new overall hypothetical utilization ratio is a very good 19%, and you just got a nice bump in the credit score!
A low credit score can have many adverse effects on your financial health, which can make the challenge of raising it seem insurmountable to some. But there’s hope! Being intentional about your spending, coupled with an understanding of what your FICO score reflects, is a great start. When my kids were younger and would be visibly stressed about a colossal task in front of them, I would always ask them, “How do you eat an elephant?” They learned to answer correctly: “One bite at a time.” The same is true with credit. You are not doomed to a life of high interest rates and rejection; all we have to do is tackle that elephant one bite at a time.
James Holmes
President, Black Lion Inc.