Limited credit or no credit history to speak of? Looking to get credit quick? You are not alone. Roughly 15% of adults in the United States have NO credit history at all – or so little that it isn’t doing them any favors.
Some close friends of ours fall into that category, and we are going to document their journey as they build up to purchasing a home later this summer. Their very first home.
They have no car loan, no credit cards, they have always rented. We know that a healthy credit history and credit score is one of the most important aspects of securing a home loan, and now our friends are in a mad dash to both establish and boost those credit scores – as quickly as possible.
While it is not necessary to have perfect credit to get a good interest rate on your car loan or home loan, you do need something! Where do you start? What do you do?
The most important factors when building credit: the amount you owe and your credit history. These two combined make up over half of the factors contributing to your FICO score.
Tips for Boosting Your Credit Score
1. Get a credit card. Be selective with whom you apply, and if possible, choose a credit card company that reports your on-time payments to all three credit bureaus – Equifax, Experian and TransUnion on a monthly basis. No sense working to boost your credit if they aren’t going to report your positive activity.
If you have absolutely no credit to speak of, you may be required to obtain a secured credit card. This is where you put down a deposit of $200 or so. That $200 will now be your credit limit. Yes, you are using your own money as collateral. If nothing else, it helps you to stay on track since you’ve already got money invested.
2. Keep your balances reasonable. In order to be beneficial to your credit, the general rule is to keep your balance at or below 30% of the card’s limit.
For example: if you have a $200 limit on your credit card, you’ll want to have no more than $60 charged at any given time.
Start by charging just your car’s gasoline. Watch your balances and stay on top of it to be sure you’re not charging too much.
Making a payment – even on the date it is due – can result in a late payment fee.
3. Make your payments on time. Do this always, not just when you’re working to boost your credit score.
Most creditors allow you to make payments online. This is fine and dandy, but you must also remember that there is a cut-off time for processing. If you make your online payment at 4:30 PM CST, that is 5:30 PM EST, and would technically be a late payment as the business day has closed on the East coast.
Make a note in your calendar to pay the bill on the business day before your bill is due. This not only helps to avoid late payments and dings to your credit, but it also avoids those late payment fees as well.
4. Building credit is not a race. Some scoring models take up to six months to calculate, while other calculation models could begin reporting after just one month of paying on a credit account. Start early.
5. Pay it off, but perhaps not entirely. Leave $10 – $15 on your $200 card when you make your payment.
The bottom line? You must have credit to get credit history. Keep plugging along and making your on-time payments, charge no more than 30% of the card’s limit, and monitor your credit using an online tool such as Credit Sesame. With services such as Credit Sesame, you’ll get your free credit score and a complete view of your credit profile. All for free.
I can’t wait to see how well our friends do, and how quickly they can boost that score from the big fat zero! Stay tuned in our get credit quick series!
Update #1:
They are up 64 in just the FIRST cycle!!! We are waiting to their credit to update again and I will keep you posted!
Disclaimer: Note that I am just an average girl, working my butt off to pay down my mortgage and afford nice things. I do not have a degree in finance, these tips are what worked for Paul and I and our credit scores. You should, of course, make all of your own financial decisions and seek an adviser if you have financial questions.
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