Why NO credit is worse than BAD credit
A few weeks ago I got a call from a man in his late 30s who was very upset that the bank he has had his checking and savings accounts with, turned him down when he applied for an equipment lease thru them. He felt insulted when they asked him to get a co-signer.
When I told him, I would require the same. He started yelling at me that he was debt free and never felt the need to have a credit card. He pays cash. And I should be happy someone like him called me instead of all the bad credit people we get. And how DARE I give $20,000 to a guy with a 590 score and I was unwilling to help him. He slammed the phone down on me as I tried to explain.
In business financing. Having a client with no credit is harder to get approved than having a client with BAD credit! And it’s the same in consumer credit. Banks know with someone with bad credit they have to limit the amount of credit issued and the repayment terms tend to be shorter than someone with good credit. But someone with no credit. No one knows how they will behave with credit. They could either be a good client or they can be a first payment default. No way to tell until they have some credit history.
Getting Started With Building Your Credit
The first step – Pull your credit report!
A lot of people feel that since they don’t have any credit, they can skip this step. But you never know. Someone may have gotten a hold of your SSN and is using it. Or perhaps if you are a Jr or Sr. Your son/fathers credit is showing up as yours. You want to check for other common errors such as:
- Are they spelling your name right?
- Do they have the right address?
- What about your employment history. Is it up to date?
Credit cards – the easiest type of credit to get
Bear in mind that you cannot establish your credit UNLESS you’re willing to take out and manage some credit.
One thing you want to avoid is having a credit report full of inquiries. To help our clients to rebuild their credit, we made a list of credit card companies that will use a soft inquiry.
The difference between a hard inquiry and a soft inquiry
A hard inquiry is the most common type of inquiry. Each time a finance company pulls your credit, a hard inquiry will appear on your credit report. Hard inquiries will also cost you points OFF your credit score. Many bad credit consumers could see a big increase in their credit score if they stopped applying for credit constantly.
What is a soft inquiry? A soft inquiry is one that doesn’t take any points away from your credit score. You can apply for them without worrying about bringing your credit score down. For a list of soft inquiry credit cards for people with bad credit click here:
The easiest types of bad credit credit cards to get approved for
1. Secured credit cards – these credit cards are virtually guaranteed approval. Secured cards require a security deposit and that security deposit will become your credit limit. Most secured credit cards will allow you to make an initial deposit of a few $100s. Making it easy to get one.
But the best ones allow you to keep making deposits to your account (thus increasing your credit limit) And the best thing is, after about 2 years of on time payments the banks will make your account UNSECURED and release your security deposit back to you!
It’s like having a great savings account that is also building your credit score! A favorite of our clients is the Applied bank secured credit card because it has a low initial security deposit, the ability for them to keep adding to their initial deposit and they can build a credit line of up to $5,000!
2. Unsecured bad credit credit cards – these credit cards are unsecured so you don’t need to save for a security deposit. And while these cars will help you to build credit, they often have a very low balance. Most unsecured bad credit cards have credit limits around $300. They also have a lot of fees associated with them. These fees are immediately put on the credit card. Meaning you get approved for a $300 card but there was $150 in fees. So you have a $150 balance to pay off as soon as you get the card.
3. Merchandise credit cards – These cards allow you to buy things thru their catalog ONLY. You want to make sure that they will report your payments to at least 1 credit bureau. We recommend the Freedom Gold Card. It reports to 1 credit bureau and will give you a credit limit up to $500
4. RentalKharma – Did you know you could have your rent reported on your credit bureau? Companies like RentalKarmha will report your rent to TransUnion (they will be adding Equifax and Experian but at the time of this article, no date has been given).
5. Get a credit builder loan. These are often offered by small banks and credit unions to help their members build credit. How they work is that you take out a loan with the company. But the funds do not get disbursed to you until the loan has been 100% paid back. While you are making these payments. The bank is reporting your payments to the credit bureaus.
What to look for in a credit building offer
- They MUST report to at least 1 credit bureau.
- Fees – look them over carefully. A lot of small companies that offer to help people with bad credit are charging big fees. You need to know what they can legally charge you. Did you know the maximum amount that can be charged for a late fee is $27 the first time and $38 a month afterward? The Consumer Financial Protection Bureau regulates these fees.
- If you have a lot of inquiries already, just apply to companies that use a soft inquiry. Don’t expect to be able to dispute off your inquiries! Too many people apply everywhere and then decide they will “clean up ” their credit by claiming they didn’t apply to these companies. Disputes don’t always work and wouldn’t you rather spend your time disputing truly erroneous information instead of spending so much time on inquiries?
Diversify your credit
As you grow your credit, you want to add some diversity. (Hint) RentalKharma does that! You don’t want a credit report full of charge cards. You need to diversify!
- Get an installment loan (like a car or personal loan)
- Remember how your credit score is calculated:
- 35% how you pay – this is one of the biggest factors to your credit score and why its so important to pay on time!
- 30% amount you owe (how much of your credit lines are you using? How much outstanding installment debt do you have?)
- 15% how long you have had credit – this is why it’s important to be wise when you close credit cards and accounts. You want to keep the oldest ones active to help your credit score
- 10% types of credit you have – too many people with bad credit have 3 of more bad credit credit cards and think they are building a solid credit report! WRONG. You need to have installment and retail accounts too!
- 10% how much new credit you have – this is very important and why so many bankruptcy attorneys get their clients into a secured credit card right after filing. You must start to build/rebuild as soon as possible. As a lender, I like to see how they have handled their credit SINCE the incident that caused their credit problems. That will tell give me a hint as to whether or not they are a good loan candidate.
- If you are a renter, use Rental Kharma to add your rent to your credit report
Managing Your Credit
With on time payments you will start to see an improvement in your credit within 6 month to 1 year. Keep these tips in mind and you should be able to build and maintain a good credit score!
- Apply for credit only when you need it. You don’t want to run out and apply for a lot of credit cards and loans all at once.
- Avoid a lot of inquiries. Remember that hard inquiries will lower your credit score
- Monitor your credit reports – the moment something seems wrong. Investigate.
- Keep your credit utilization low! You want to be using less than 30% of your available credit
- Set up all your accounts on automatic payment. Even if you only pay the minimum amount at that time, at least you are on time! You can always make other payments throughout the month.