If you’re new to credit or going through the process of rebuilding your credit it’s easy to get discouraged. Trying to figure out the best way to go about building credit can be absolute frustrating, but it definitely doesn’t have to be that way. Here are three easy methods to consider when it comes time for you to get back into the credit game:
Secured Credit Cards
Opening a secured credit card is one of the easiest ways for consumers to build or establish credit. A secured credit card works just like a traditional credit card with one exception, they require a minimum of $200 cash deposit up front before you can obtain the credit card. The cash deposit acts as collateral for the bank who then issues you a credit card with a credit limit equal to your cash deposit.
For example, if you make a cash deposit of $250, the bank would then issue you a secured credit card with a $250 credit limit. Because secured cards are essentially “guaranteed” by a cash deposit, they’re much easier to obtain than traditional credit cards. As long as you manage the card responsibly, meaning you make all your payments on time and avoid maxing out the credit limit, secured cards are an excellent way to establish credit and build solid credit scores as long as they credit card issuer reports your account to the national credit reporting agencies; Experian, TransUnion and Equifax.
Important Note: DO NOT max out the credit card, use once a month (to show activity) and only 30% (or $75) max of your available credit limit (to demonstrate credit management), for optimal results use only 10% (or $25) of your available credit limit.
The Authorized User Strategy
Another great way to build solid credit is to have a parent, spouse or relative add you as an authorized user on one of their existing credit cards. As an authorized user you get all the benefits of the primary cardholder, allowing you to use the card just like the primary cardholder would. And because credit card issuers typically report the account to the authorized user’s credit reports, you get the added credit building benefit of managing the account without liability. However, as we write this blog this phase of credit building is slowly being phased out by the credit card companies.
The caution here is that in order for the account to help you establish and build a solid credit score, it needs to be a well-managed credit card. Make sure the balance is low relative to the credit limit and, if possible, choose to have your name added to a credit card that is older rather than newer.
The phenomenal aspect of the authorized user strategy is that if the primary cardholder starts to miss payments or otherwise mismanages the card you can have your name removed from the account. Once your name is removed it’s relatively easy to have the account removed from your credit reports.
Another way to establish credit is with a small credit builder loan. These loans are typically offered by credit unions and are low dollar loans, usually no more than $550. In fact, they are often marketed as having the sole purpose of establishing and building credit.
The credit union approves the loan and holds the funds in an interest bearing account on your behalf until you’ve made all the monthly payments required to exhaust the balance due. After you’ve paid off the loan they release the money to you. As long as they report your payment history to the credit reporting agencies, these types of loans can help you establish and build a solid credit history.
If you decide to go with the credit builder loan option, make sure you first check that the credit union will report the loan to all three credit-reporting agencies. Otherwise, you won’t get any credit building benefits for managing the account properly.