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How to build your credit history

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Creditworthiness plays a huge role when obtaining any type of loan, be it car, house, renting an apartment, opening new credit card or subscribing to a phone plan. Bad credit or no credit at all gets your application either denied or a loan with a very high interest rate. 

Let’s look at scenarios that can help you build credit or repair bad credit. 

I don’t have credit history, where do I begin?

Become someone’s credit card authorized user

Have someone with a great/excellent credit score, for example a family member, add you as an authorized user to their credit card. By default, when they add you, the credit card is sent to them not you. So they may decide to give it to you or not. You will be building credit history based on the use of that account, be it by you or them. Since you are piggy-backing on on some’s history, if they have excellent scores, you will see your own score start high or grow fast. I recently  added a family member with zero history as an authorized user to my credit accounts and within a short time, their score was in the borderline of “Very Good” and “Excellent” range. 

Open a secured credit card

Most banks will allow you to open a credit card account if you have a co-signer to that account. A co-signer basically agrees to be held responsible for any non-payment in your account. That means if you don’t pay on time, it hurts both your score and theirs. A co-signer can have access to make payments or monitor that account. 

Some banks have programs in which you can open a credit card account by depositing amount greater or equal to the credit limit. You can start as low as $300. This ensures that there is an amount in your account to cover your expenses while the bank reports your “timely” payments and good standing to credit reporting agencies.

Open a student credit card

If you are enrolled in school, you can open an account without a cosigner or security deposit. Interest rate may be high and the credit line may be low. Refrain from carrying over balances to avoid high interest charges.

How do I build my score?

Make purchases primarily using your credit card

In the past years, my only mode of purchase has been credit card, from small purchases to large ones. The caveat to this is; only spend what you can pay off, and you should pay promptly. Most banks have an AutoPay feature. Use it! Set it up so that at the end of the month, you pay off all the balance in your credit card. An exception may be if you make a large purchase that you intend to pay monthly over a period of time. From your credit accounts, pick one account with low interest and higher limit and make it your primary.  While you are at it, check if they have cash back rewards program or great points system. You will enjoy receiving unexpected cash deposited in your account or few gift cards such as gas cards in the mail (or redeem your points via means offered by your bank).

If you have a joint account with your partner or another person, use this account as your primary purchasing account. Showing a trend of usage and payment in your account puts you in favor with the bank when you call to ask for credit line increase. This brings me to my next point…

Request credit line increase

Your credit limit determines your credit utilization ratio. Credit utilization ratio is the percent of unpaid credit balance against your total limit. For example, if you spend $50 on a $300 limit, your ratio 17%. If you spend $50 on $5,000 limit, your ratio is 1%. You want to have a low utilization ratio. It is recommended that your utilization stays below 30%.  You can see why requesting an increase in credit limit can be beneficial. Some banks allow you to request increase online through your online banking account. You just answer a few questions and the requested limit, and they approve/disapprove instantly. You can request increase every 6 months or every year. Requesting increase even on cards that you don’t use increases your overall creditworthiness and lowers your utilization ratio.

Get store credit card when making initial large purchase

Big furniture or electronic stores such as Overstock, BestBuy, Amazon, Walmart,  offer store credit cards with added benefits. If you are a frequent customer, you stand to gain points that translate to gift cards or store credit. Some might offer discount for opening a line of credit with their  card or deferred interest for the purchase. Once you clear the payment, do not close the account. Never close any card unless the credit company closes it for whatever reason. Longevity of your credit accounts affect your credit score. The longer you have them open the better. Please note that some stores might terminate the credit account if there is no activity. Some require at least one transaction every month to keep you current. If you have AutoPay set up right, you should not worry about which card you use. 

Monitor your accounts

I personally use Mint to track all my accounts in one place and CreditKarma to track my credit history. These are two great tools to keep an eye on your finances. They both offer great tips on managing your finances and also recommend credit cards that you qualify based on your income and credit score. Both monitor your credit score and alert you when it changes and they are free services.

While CreditKarma pulls your report from the 3 major credit card bereaus for a general overview, you can also monitor your full credit report directly from those bureaus for free once a year through https://freecreditreport.com. The best approach is to pull report from one company, then the others after 4 months each, that way you have a report every 4 months for free. They all offer other premium  services such as identity theft monitoring.

Credit cards are nothing to be afraid of if you are disciplined in the way you spend and pay off your credit debts in  a timely manner. Be aware that opening multiple credit card accounts within a short period of time can hurt your score.

What are other ways out there that I did not mention here?

Disclaimer: this post does not constitute a legal advice or substitute a service from a financial adviser. I’m in no way an expert in this area. I am sharing ways that have worked for me and close friends that I thought are worth sharing. Contact your attorney or financial adviser for professional consultation.

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