From Zero To Hero
Consumers who have no credit often have a hard time getting approved for loans. If you are one of these individuals then you probably already know this. Normally you’ll need a credit card or loan in order to establish credit, yet you need established credit in order to get approved for a credit card or a loan. Sounds almost like a catch 22.
Credit can be tricky, but never fear! There are ways to build your credit from the ground up without hopelessly applying for credit cards only to keep getting declined. First, let’s take a gander at the credit score influences to better understand what makes up your score.
How are Credit Scores Generated?
A couple of months ago we wrote an article (and released a video): What Makes Up Your Credit Score. In the article, we went over the 5 main factors that are responsible for generating your credit score. They are as follows:
- Payment History (35%): Make your Payments on time. Just one late payment will bring your score down drastically and can go against your credit score for up to 7 years!
- Amounts Owed (30%): Credit utilization plays a big factor when it comes to determining your score. Best practices say you should use your cards regularly, but never go over 20%-30% of your credit limit.
- Length of Credit History (15%): Try your best to keep cards open for as long as possible. Closing old accounts will cause your utilization to rise and credit history to shorten.
- Variety of Credit (10%): Having a variety of credit shows the credit bureaus that you can handle different types of credit. This is something that should be obtained over time.
- New Credit (10%): Any new credit account will drop your score simply because the bureaus aren’t sure of how well it will be maintained yet.
Now that you understand the basics of scoring your credit, let’s start focusing on what we can do to build your score.
Check your Credit Report
In 2013, a study by the FTC found that 1 in 5 consumers had errors in their credit report. Your credit report should be checked on a regular basis. Every consumer has a right to a free credit report from all 3 bureaus. Go to annualcreditreport.com and check to make sure everything is reporting correctly. These reports won’t give you a credit score, just the history (that’s alright though, if you have no established credit you won’t be able to generate a score yet anyway.)
Apply for Cards
Without any established credit, chances are you’ll get declined for most credit cards. Luckily, there are other options for people with no credit.
Secured Credit Cards: Secured credit cards are credit cards that are backed by a cash deposit. The credit limits are usually low (only a few hundred dollars) and you’ll get the deposit back once you close the card. Once backing your secured card, you’ll use it just like a regular credit card. Pay of the account each month, don’t max it out and make sure you make on time payments.
After a couple months of use, the secured card should generate you positive lines of credit. At this time you can graduate to a regular unsecured credit card. You can obtain secured credit cards from your bank or our website here.
Become an Authorized User: You know that family member or friend you have with immaculate credit? If it’s okay with them, you can become an authorized user on their account. After becoming an authorized user, your credit report will start show the said account, helping you generate some positive credit!
Student Credit Cards: Student credit cards are great options for a young person looking to start building their credit. Although the credit limits are usually low with a high interest rate, the acceptance rates are high, allowing you to build credit at a young age.
Retail Cards: Retail store cards can help consumers save money at their favorite stores and are pretty easy to get approved for. There are some drawbacks to retail store cards though. Aside from the fact that you’ll have to go shopping regularly, they usually have a small limit with above average interest rates.
Get a Cosigner: If you don’t like the previous options, you can still obtain a regular credit card with the help of a cosigner. Just know you will be partially responsible for the fate of your cosigner’s credit. Any derogatory remarks you make on the cosigned account will also appear on your cosigner’s credit report, so make sure you always pay on time and keep your utilization low.
Use Best Practices
After getting your card, make it a point to use it correctly with these best practices:
- Use your card regularly: The credit bureaus want to see you use your card (just make sure don’t live beyond your means and charge what you can’t afford.) If you don’t use the card the lender may close it due to inactivity, which will cause a drop in your score.
- ALWAYS Pay On Time: Late payments are the #1 reason for declines in credit scores. They’ll drop your score and go against your credit for years. Make sure you always pay on or before the due date each month.
- Pay Off the Balance Every Month: Pay off the balance so you don’t get killed with interest. Doing so over a period of time will also generate you a good credit score.
- Keep Your Balances Low: Consumers with the best scores have them because they keep their balances between 1%-10% every month. Try to replicate their practices and give yourself a limit of 30% or lower of your high credit limit and NEVER max out!
- Keep Accounts Open: Old credit cards aren’t like old appliances. The older they get the more beneficial they are to your credit. Try to keep your old accounts open as they are helping your credit the most.
Monitor Your Progress
You’ve educated yourself, you’ve gotten your first card and you’ve learned the best practices, now’s the time to watch your score go sky high. Watching your credit score rise from scratch can be fun and exciting. Enroll with a credit monitoring program to ensure everything is still reporting correctly and make sure you make good use of the best practices above in your journey to the 700 club (or higher!)