If you’ve never had a credit card or a loan, your credit history is most likely a blank slate. Your credit history, as documented on your credit report, is a record of how responsibly you’ve repaid money you’ve borrowed.
Creditors and lenders use your credit history to make decisions about whether to give you a credit card or extend a loan. However, if you have no credit history, there’s no record of how you might manage debt. As a result, many creditors and lenders won’t lend you money.
It may seem like an impossible loop, but there are ways to build credit when you have no credit. First and foremost, pay on time any bills that come your way. If you don’t have a checking account, open one. You have very little credibility with lenders if you don’t have at least a checking account, and preferably a savings account as well.
Just as importantly, be sure not to overdraw your bank account. Bouncing checks sends a signal to potential lenders that you can’t manage your daily finances and are therefore not a good credit risk.
Another important factor lenders look at is your employment history. They want to see if you are able to hold a job or if there are periods of unemployment. Your ability to hold a steady job can improve the likelihood of getting approved.
There are three basic types of credit available.
1. Revolving credit. Most major credit cards and some department store cards are revolving credit accounts. You have a credit limit or “line,” and your monthly payments are based on how much credit you’ve used at any time. Most revolving credit is unsecured.
2. Open 30-day agreements. Charge cards require you to pay off your balance at the end of each month or 30-day agreement period. Your balance depends on your ability to pay and your past usage. Interest is only charged on late payments. If you make too many late payments, you may lose the card.
3. Installment loans. Mortgages, cars, furniture and personal loans are types of installment loans. You borrow a fixed amount of money and are given a period of time to pay it back, usually in equal monthly payments. Most loans are secured by the property you are purchasing.
Where do I start?
Get a secured credit card. A secured credit card is just like a “regular” or unsecured credit card, only you are required to put down a security deposit — typically $300 to $500 — to provide assurance to the creditor that you will repay your debt. Your credit limit is often the amount of your security deposit, or a percentage thereof.
Many people confuse a secured credit card with a debit card; however, the two are very different. First, banks do not report debit card usage to the credit bureaus, as a debit card is not an extension of credit. A debit card is merely a convenient way to access the funds in your bank account.
Creditors, on the other hand, do typically report secured credit card activity to the credit bureaus, as a secured credit card is an extension of credit. Your purchases are not deducted from your security deposit. Rather, each time you charge something, you are effectively borrowing money from the credit card company and are obligated to repay that debt. As a result, how responsibly you use a secured credit card will affect your credit score — both positively and negatively
Only charge what you can afford to pay off in full. Building credit means consistently demonstrating your ability to pay back any money you borrow. Your goal is to prove to creditors and lenders that you can responsibly manage debt. That’s why it’s smart to start small — only charge purchases that you can afford to pay off in full every month.
Unfortunately, it’s not enough to open a credit card — secured or otherwise — and sit on it. If you don’t use your credit card, you’re not demonstrating anything. Use your card at least once a month for small purchases like inexpensive meals, gasoline and drug store essentials. Try to not charge more than 50 percent of your credit limit in a given month, however, as that can take a toll on your credit score.
Establish a relationship with a bank. This will improve your chances in obtaining a loan or credit card through them. If you already do business with a bank, they should be the first place to look. Once you have a few of these things in place, give it time. Having good credit over a long period of time will go a long way towards convincing lenders that you’re a solid bet. Don’t rush the process.
Shawna Frazier, a realtor for Re/Max Results, has had a successful full-time real estate business for the past 12 years. Her goal in the coming weeks is to share information of value to MSR readers that will include tips on selling, buying, investing, and restoring your credit. She welcomes reader responses to Shawna.frazier@results.net.
Reach the MSR staff at msrnewsonline@spokesman-recorder.com.