.png)
Building Credit
I want to share some of the knowledge I have learned in the past 8 years of working in the finance industry. I have worked with hundreds of clients and have seen numerous situations that have taught me a lot about credit reports, how to increase your score, and what NOT to do. Today, I want to explain how to start building your credit. Now, if already have credit established (fair or poor), this post is NOT for you. Stay tuned, because one is coming for you as well.
Please note that the following tips are based on my experiences in lending and your credit and situation may differ from others.
1. View Your Credit Report - This may sound silly, but the first step in starting to build your credit is knowing where you stand. Now, when I say stand, I mean what is on your report, not what your credit score is. You can do this free, once a year at Annualcreditreport.com (CLICK HERE). This report will not include any credit scores, however it will show you if you have any outstanding credit or any credit you may not know about.
TIP: Double check for fraud. I have had many clients have fraud on their report that they had no idea about!
2. Installment Credit - Once you have your report, and you have viewed and ensured everything is accurate, the next step is to start establishing Installment Credit. Installment Credit is any loan that is associated with collateral (house, car, boat, secured loan, etc.).
Now, if you have very little credit or none, it will be very difficult to open one of these loans without a co-signer. The easiest way to start up your Installment Credit is to open up a Secured Personal Loan (pretty much every major bank or credit union offers this). Typically you will need to save anywhere from $300-$1,000 before you can begin this. Once you have the funds, essentially you are borrowing from yourself. You secure the amount of money (they usually keep it in a savings account), then make payments. Once the loan is paid off, you receive your money back.
TIP: Try for an installment loan of 24-36 months minimum, as this will help lengthen your credit history.
3. Revolving Credit - Revolving Credit is the opposite of Installment Credit; it does not have collateral associated with it (line of credit, credit card, etc.). This is viewed as more risky to lenders and can be a bit more difficult to be approved for than Installment Credit. If you already have some Installment Credit established, it will be easier to be approved for a credit card. Again, go to your local bank or credit union to discuss opening up a small credit card. Perhaps start with a $300-$500 limit.
TIP: Keep all credit card balances below 50% of the limit. IE: If your limit is $1,000, try your best to keep the balance below $500. Anything over 50%, will have a negative factor on your credit score.
4. Pay Loans On Time, ALWAYS - It is so important to continue to pay your payments on time. Even just 1 late payment can stay on your credit report for SEVEN YEARS!
TIP: Set up your payments on auto-pay, this way you never have to remember what the due date is.
5. Limit Credit Inquiries - Each time you apply for a loan or credit card (even if you are not approved), there will be a ding on your credit report. All inquiries stay on your credit for 24 months, however will only impact your score for the first 12 months.
TIP: Try to limit an inquiry once per quarter (or less). This will ensure your score is not impacted by inquiries.
Building your credit can take time. Be patient and know that over time, your score can keep improving! Although you may not need to borrow money TODAY, it is always a great idea to start working on your credit, so when you do need to, you will be ready.
I have a lot of love for crunching numbers and the finance world and want to share my experiences to help. Stay tuned for more tips on credit!
-Tabitha Joy
