Unfortunately, credit is something that you just can’t live without these days. If you want to buy a house, for example, unless you’re Warren Buffet you’ll need to have a solid credit profile.
If you’re young and want to get a loan for a car, you can’t do it unless you already have a credit history. If you don’t have credit and are applying for your first job after college or getting your first apartment, again you’re going to need some credit history.
However, in order to build credit, you need to have credit in the first place. It’s a catch-22 that a lot of borrowers are faced with. So how do you build credit when no one is willing to give you a chance?
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What factors make up your credit score?
You oftentimes hear on television commercials and financial news shows about this all-important credit score. A credit score is a very important number that is associated with an individual.
When you apply for a loan, the lender will check your credit score with one of three major credit reporting agencies, Experian, TransUnion, and Equifax.
The check will return a number and that number reflects the creditworthiness of the loan applicant. In other words, a credit score shows the likelihood that the person wanting to borrow money will in fact pay it back per the terms of the agreement (source).
Many don’t know what goes into computing this score so here’s a synopsis of what is involved.
The variables that make up a credit score include payment history, level of debt, number of inquiries, credit history length, and types of credit.
Payment history
Your payment history weighs significantly in computing a credit score. In fact, it is given a weight of 35%
This variable reflects how reliable you are in paying your bills. Late payments are taken into consideration and recent payment history has a greater effect than older history.
Level of debt
The level of debt variable reflects how much you owe in relation to how much credit you have available. Since there is no way of accurately knowing your income, it doesn’t come into the picture. When this ratio increases, your credit score is lower. Recommendations are to never let this ratio go above 30%.
Recent credit inquiries
A credit inquiry is done each time you are applying for a loan. If the frequency of credit inquiries on your behalf is high, it means that you are looking to take on more credit or you are having trouble with your finances. Only inquiries within the last year are used.
Length of your credit history
A lengthy credit history gives an indication of how you spend. Therefore, your credit score benefits by having a long history. This is one reason why you should not close credit card accounts that you have paid off. It is also one of the reasons why those starting out don’t have any credit and that is because there is no history.
Credit mix
Having a credit mix of different types of loans (auto, credit card, and home mortgage) gives an indication of how well you manage your debt if other variables are favorable such as a low debt ratio.
Ready to boost your credit score fast? Follow these 7 easy ways to build a stellar credit history.
How to boost your credit score fast
Pay your bills on time
Prompt payment accounts for about 65% of your credit score. Even if you make no other changes, just paying your bills on or before the due date can significantly improve your credit. Use a calendar and mark when each bill is due to make sure they are all paid on time.
Have more available credit
Keep a significant portion of your credit available. You should only borrow a maximum of 35% of your available credit. Once you get above that limit, lenders get weary and may not want to grant you new loans. If you’re trying to buy a house or make another major purchase, the goal is 10% or less.
Resist closing old accounts
Even if you don’t use a credit card anymore, it’s not smart to close the old account. Old accounts, even ones you don’t use, contribute to your available credit, which lowers the credit to debt ratio and makes you more attractive to lenders.
Check your credit limits
Check to make sure lenders are reporting your credit accurately. Particularly, be sure that lenders are reporting your limits accurately. If you owe $2,400 and your limit is being reported as $2,500, that’s going to really hurt your credit score. If your real limit is $5,000 then your score should go up when this mistake is fixed.
A neat trick to boost your credit score is to contact your credit card company and ask them to raise your credit limit. If they agree, your score will automatically go up because of your improved debt to credit ratio.
Pay down your debt
Work to pay off your worst types of debt first. No-money-down debts are some of the worst kind, so paying those off as soon as possible is a good idea. You can use a home equity loan to pay the debts off, as that type of loan is less damaging than a no-money-down loan.
Of course, if you’re struggling to pay your no-money-down loan, risking your house to relieve bad debt is never a good idea.
Negotiate your debt status
Deal with overdue accounts in a manner that will do the least amount of damage to your credit. Paying off debts that have been sent to collections doesn’t tend to improve your score much because of their designation on your credit score.
To fix this problem, try negotiating with the credit card company in writing to have them list your account as “paid as agreed”, which won’t be as damaging. Of course, having no notation is the preferred choice. You can negotiate in other ways too.
Contact your credit card company and ask them to lower your rate. If they do, you can get your debt paid off sooner. If you have an old debt with $500 owed, you may also negotiate with that company to get it removed from your report if you pay a portion of it.
Don’t request more debt
Requesting a loan can trigger what’s known as a hard inquiry on your credit. Having too many hard inquiries over a short period of time can be damaging.
Watch the number of inquiries made in a short period of time and make sure you don’t accidentally cause damage to your score.
Review your report for errors
Review your credit report with a fine-tooth comb. Consumer watchdog groups have reported that up to 80% of credit reports contain an error. Those errors could be damaging your credit score.
It’s a good idea to review your credit report on an annual basis to make sure there aren’t any errors. If there are any errors, make sure to contact them to get them fixed.
Get Added As An Authorized User
Become an authorized user on a relatives’ credit card. It’s a great way to start your credit history. Once this is done, the credit card shows up on your credit report. This means you inherit the age of the account, the payment history, and the credit limit.
If the person you make the request of is hesitant about adding you to their card, reassure them that you only need to be added to the account – you don’t actually need a card. This way, you’ll improve your credit and the owner of the account risks nothing.
Some credit card issuers do not report authorized users to the three major credit bureaus, Experian, Equifax, and TransUnion. Before opening up an account, call the credit card company and ask them if they report to all three credit bureaus.
Find A Co-Signer
When you don’t have credit it’s downright impossible to qualify for a loan. But if you find a cosigner with good credit you’ll surely be approved. The hard part is finding a willing family member or friend to help you out.
The reason it’s difficult to find someone to be your cosigner is because when you use a cosigner’s credit, they become responsible for the payments, not you. If you miss a payment, you’ll end up ruining their credit and your relationship with them. So take this commitment seriously.
Apply For A Secured Credit Card
Credit cards are an easy way to build credit. But you probably won’t qualify for a credit card if you don’t have any credit to begin with. That’s where secured credit cards come in to save the day.
A secured credit card works like this. You first have to make a cash deposit into the account, as collateral. The amount you deposit then becomes your credit limit. The banks let anyone have a secured credit card because there is no risk to them. If you stop making your payments, they’ll simply keep your deposit and close your account.
The card works just like a regular credit card and shows up on your credit report. If you use this card responsibly, the credit card company may upgrade your secured credit card to a regular credit card once you’ve built up some credit history.
Diversify Your Debt
The types of debt you have in your report account for roughly 10 percent of your FICO score. That 10 percent can have a huge impact on the way lenders view your creditworthiness, especially if there isn’t a lot of other information in your profile for them to go by.
So while having a credit card is important to building your credit, just one credit card isn’t going to get the job done. You’ll also want to add a student loan into the mix and a car loan as well.
How do you get these other types of loans with no credit you ask? Well, it’s very easy to be approved for a student loan. You also don’t have to pay it back until you’re done with school. As far as a car loan goes, you can get a car loan even with no credit history if you put a solid down payment for the car and have a steady job.
Ask Your Bank For Advice
If you’re hitting a brick wall when it comes to getting started on creating a credit history, ask your bank what to do. They may have several options at their disposal.
If you have had a checking account at your bank for a while with a good history, they may offer you a credit card with a small credit limit or even a personal loan to get you started.
Consider Store Cards
The bad part about getting a store credit card is that they oftentimes carry a high-interest rate and they have yearly fees. But there is one good thing about store credit cards – they’re easy to get.
If you don’t have much credit history, take out a store card, and slowly build your credit history while shopping for the things you would buy anyway. Just be sure and pay off the balance entirely every month so you don’t accrue nasty interest charges.
Ask Lenders To Report
Making late payments can have adverse effects on your credit. In a perfect world, you would make timely payments on your bills and companies would then tell credit reporting companies that you’re an awesome borrower. But not every company reports your monthly payments.
If one of your monthly obligations isn’t showing up on your credit report, you can ask the credit bureaus to add it for you. If that doesn’t work, you can ask the service provider to do it. Even your landlord may report your rent payments to the credit bureaus. You might strike out in this respect, but it doesn’t hurt to take a swing at it.
Do nothing at all
In order to keep your credit in good standing, don’t mess up. Sometimes, improving your score is as easy as giving it time and doing nothing at all. If you’re on the right track, keep doing what you’re doing. Pay your bills on time, keep track of your credit report and make sure that you don’t do anything to damage your score.
Good credit is hard to get, so once you reach your goals, don’t do anything to set yourself back.
