Why Building Credit Is So Important
Did you know having no credit is worse than having bad credit? We work with lenders all the time willing to lend money to clients with bad credit scores. I’ve personally helped a business owner finance a commercial grade riding mower of $24,000 with a credit score of 540.
But , when a business owner with no debt and no credit called. He was already very upset because he had been turned down by his local bank. A bank he had done business with for over 10 years, and called several equipment financing companies before finding us and been turned away! I unfortunately, had to do the same thing! Business credit is not the place to start building credit! Banks like to see how you have handled credit in the past before taking that leap of faith and financing your business. That’s why having strong personal credit will not only help you reach your personal financial goals, but if you have dreams of being a business owner, start building your credit now!
Ways To Build Credit
1. Become an authorized user. If you have a friend or family member willing to do this. This is the easiest and fastest way to build your credit. When they add you to this line of credit, their good credit will become yours! The account or accounts you want them to add you to should be
- Aged: At least 5 years old
- All payments made on time – no need to become a signer on an account in bad standing!
- Should have a decent credit line. You don’t want to be an authorized user on a $300 credit card.
There is considerable risk to the person who put you on as an authorized user. They are basically giving you permission to make charges to that line of credit. This will make most people (besides your parents say NO!) What you can do to make them feel safe is tell them NOT to issue you a card. If its a line of credit that they draw on using checks, just tell them you don’t want any checks. You want to make them feel as comfortable as possible.
Finding A Co-signer
2. Find a co-signer. Again, this is easier said then done. To many people, including myself have advised people to NEVER become a co-signer. But if you have bad credit or no credit. Having someone cosign on a loan or credit card will help you build credit fast! Why?
- They can qualify for a good credit or even reward credit card
- They can qualify for low interest rates (no need to ask someone with bad credit to be your co-signer! Aim high! Look for someone with at least a 680 credit score.
- They can qualify for larger lines of credit. You want to buy a car on your own within a year? Lenders will look to see the highest line of credit you have had. The higher the credit line the better! This is called comparable credit. Its a small leap of faith for a lender to lend you $25,000 for a car when they see you have a $10,000 line of credit on your credit report. But if they see your highest credit line is a $500 credit card. That’s a big leap of faith.
- They have substantial credit history. Thus making the lender feel safe in extending credit.
Again, this is risky to the Co-signer! If you miss a payment, you will drag their credit score down. A few things that might make them feel safe in being your co-signer
- Give them a security deposit of one or 2 monthly payments before they open the account! This gives them the means to make a payment if you are having problems.
- If its a credit card they are agreeing to co-sign for, even if they get you a $10,000 line of credit, agree to use only a portion of that credit line.
- Opt for paperless bills and share the account w/ your co-signer. They can monitor the bills and if they feel you are taking on too much debt they can call the creditor and close the account.
- Give them an exit plan. Let them know that if they co-sign for this loan. You will refinance it out of their name at an agreed upon time.
Using Credit Cards To Build Credit
3. Get a secured credit card: A secured credit card is the BEST way to build credit. Not only are you getting a credit card that will report your activity to the credit reporting agencies. But you are also building a savings account! Usually within 2 years of opening your account, and having a good payment history. The bank will change your credit card to unsecured AND you get your security deposit back!
Things to look for in a secured credit card:
- Must report to at least 1 credit reporting agency
- Does the security deposit equal the amount that you are given as a credit limit? Most cards will give you 100% of your deposit but there are some that will give you 75% or some that will give you 125%!
- Does it allow you to add to your security deposit as time goes by? This is important because on your credit report, it will look like the credit grantor felt you were such a low risk that they INCREASED your spending limit. This is also good in building your comparable credit and of course your savings account!</li?
4. Build credit using guaranteed approval and / or Bad credit credit cards are especially designed for people with bad or no credit. The benefit to these types of cards are that they guarantee approval. Many don’t even credit check.
Things to look for in a guaranteed approval or bad credit credit card:
- It MUST report to at least 1 credit bureau. There is no point in having the card if it doesn’t help build your credit.
- Look at the fees! A lot of unsecured bad credit credit cards have a lot of fees. I often tell people to save their money and get a secured credit card instead. But for some, it will take them a long time to save up for the security deposit, and they would rather just pay the fees and start working on fixing their credit right away.
Diversify your credit report
5. Find a credit builder loan: Its important to diversify your credit. Credit builder loans are installment loans usually issued by your local bank or credit union. The way they work is that the issuing bank will approve you for a loan. They immediately place the loan amount in a savings account. Once you have fully paid off the loan, they release the funds to you. While you are making these payments, they are reporting your payments to the credit builders, thus helping you build your credit with no risk to themselves. And if you pay it back you can see a big boost to your credit score, some say as much as 35 points with 6 months of on time payments!