My last blog was about “Why you need to build your credit”. To further emphasize the points mentioned in my last blog, I just want to share with you that today I booked airplane tickets for two, made reservations for a two-night stay in a 5 star hotel and a car rental for two days…all using points from my credit card. So, if you are young or a recent immigrant, it is time to make those credit card charges work for you! But first, let me tell you how to build your credit.
There are several ways to build credit. Whichever method you use, it is essential that your lender reports your activity to the credit bureaus. If they don’t, you won’t build credit. Ask your lender if they report to credit bureaus before borrowing, and then verify by checking your credit reports after at least 30 days.
Get a secured credit card from your bank or credit union. These cards are easier to qualify for because you deposit money with the bank before using the card, and your limit will be the same as your deposit. As a result, any spending you do with the card is “secured” by the money you’re letting them hold onto – if you don’t pay off the card, they can take your deposit. For example, you might deposit $500, and you’d get a secured credit card with a limit of $500. Note that a secured credit card is not the same thing as a prepaid debit card.
Use a co-signer (who has good credit) to help you qualify for a loan. Lenders will consider the co-signer’s existing credit. The co-signer essentially ‘vouches’ for you while you build credit. Note that this is a big responsibility – you can cause major headaches for the co-signer if you don’t pay as agreed.
Become an authorized user on somebody else’s credit card (usually a parent or a spouse). This practice adds the account to your credit files, and helps you build credit.
Use retailer programs for modestly large purchases like furniture. For example, you might buy a sofa on the “$40/Month Payment Plan”. Gas station cards can help as well. These programs can be easier to qualify for than traditional credit cards, and they certainly help you build credit.
Apply for a personal loan at your bank or credit union. Using an unsecured loan helps you move beyond credit cards and loans from retailers. Instead of paying as you charge, you’ll make a regular monthly payment (which the credit scoring programs like to see).
Use different types of loans. As you build credit, use several different types of loans to create a rich mix of loans in your credit files. Don’t borrow for the sake of borrowing, but add in a student loan or auto loan where appropriate (don’t just use credit cards to pay for school or your next car). This shows that you know how to use different types of loans for different situations.
YOUR WORK DOES NOT STOP HERE; you need to make sure your credit continues to grow.
Monitor your credit reports regularly. The US Government requires the credit bureaus to provide a free credit report to you annually, and you should take advantage of this free service. Go to annualcreditreport.com to order your free credit report.
If you use any kind of credit card, be sure not to spend anywhere near the limit on the card. Try to stay below 30% of your limit (for example, if your limit is $1000, don’t spend more than $300 without paying off the balance).
If you’re having an especially hard time building credit, just start doing things that may eventually be used on “alternative” credit reports: get utility accounts (gas and electric) in your name, and be sure to pay your mortgage or rent on time. It might even help to open a checking account at a small bank or credit union. Using those accounts responsibly may improve your chances. There’s no guarantee that a lender will take this information into consideration, but it’s better than nothing.