Building Credit

What You Need to Know About Building Your Credit

A couple of the more difficult things in life are trying to get credit when you don't have any and rebuilding damaged credit. A line of credit is very helpful when a person is trying to make big ticket purchases such as a car or a house. Here are a few helpful things to consider within that process:

Starting Small

A person who has never had a line of credit can often go to a department store and apply for a small line of credit and get approved if they have been employed for at least a year. The credit limit may be something small such as $500 or $1000, but when the minimum amount, or better yet, the full balance is paid off every month on time, it allows for a starting point in establishing a good credit history. One motivating factor for paying this off every month is to avoid finance charges and late fees. Department store credit cards have some of the highest annual percentage rates (APRs) in the credit industry, and thus, the highest finance charges.

The good news is that after doing that for about six months, a person with no credit may then qualify for a major credit card such as a Visa or a Master Card. If a person works for an employer who is connected to a credit union, getting a Visa or Master Card is often easier than with a typical bank because of the credit union's relationship with the employer. Credit Union credit cards usually have lower APRs than a standard bank, so if the borrower ends up carrying a balance, the finance charge is lower.

In a situation where a person with damaged credit is attempting to establish new credit in an attempt to repair their credit history, sometimes a secured credit card is an option. A secured credit card can also be a nice option for someone who doesn't have any credit, doesn't work for a company that offers a credit union membership, and doesn't want to fool with a department store credit card. A secured credit card allows the user to make a security deposit on their credit card of maybe $200 (depending on the lending institution) and get approved for a line of credit.  There are several banks and credit unions that offer this option, but it is not typically well advertised. So if a person is interested in this, it's always worth asking if that option is available.

One thing to keep in mind is that more credit cards does not mean a better credit score. Even if there aren't any balances being carried on the cards, the fact that the credit is available will count against a person on their credit bureau with credit reporting agencies. That open line of credit is counted against a person's income and is actually counted as debt. So it's best to keep credit cards at no more than three, and close any cards that aren't being used. It's also best to keep credit applications at a minimum, because credit inquiries weigh negatively against a person's credit bureau too.

In the case of a parent helping a young adult child to begin a line of credit, one way that this can be done is for the parent to open a credit card in their own name and put their child on as an authorized user. The child then gets the benefit of a line of credit that gets reported to the credit bureau as a positive report, but the child has no responsibility for the debt. Another option is to open a joint account with the child and have the child take responsibilities for the payments.

Managing Your Credit

It's a good idea to get a credit report once a year just to make sure that things are being accurately reported, and no credit fraud is taking place. There are three credit bureaus that report credit activity: Equifax, TransUnion and Experian. A person is entitled to one free report every year.

These three bureaus are the ones at which lenders of big ticket items such as cars and homes look. They will also report credit activity, so again, making car payments and mortgage payments on time is important for a person to keep their credit report positive.

Where getting credit cards paid off is concerned, it can be helpful to take advantage of occasional 0% APRs on balance transfers. The thing to keep in mind, though, is that this is usually an introductory rate that ends in something like six or twelve months. If a person is confident that they will be able to pay the balance off or at least down significantly once the introductory period is over, this can be a great deal provided that the new APR will be lower than the present APRs.

Life Without Credit Cards

There are actually options out there for people who want to have a life free of credit cards. Besides the obvious option of just always using a debit card, there is also the option of a pre-paid credit card. These can usually be purchased at any national retail chain such as a Kroger or Meijer store. The user just brings cash to the store, goes to customer service, and then the card gets charged with the cash equivalent. A pre-paid credit card does not get reported to a credit bureau. So if a person chooses to completely avoid debt and credit cards, they will not have a credit report, even if they have a social security number.

It is actually possible to purchase a car without a line of credit. If a person simply saves up their money and pays with cash or a check, they can still purchase a car. In fact, purchasing a car that way is a lot less hassle because there is a lot less paperwork involved when there isn't a bank involved. The dealership may want contact the bank of the purchaser to make sure that the funds are actually there as written on the check, so when writing a check, it's best to close the deal during normal banking hours.

Getting a home loan without a credit score is also possible. This usually involves a process called underwriting. An FHA loan is an underwritten loan and involves elements besides a credit score, such as debt to income ratio, employment history, savings, down payment, and appraisal. Another underwriter worth checking into is Churchill Mortgage.

The above are just a few of the basic things that a person needs to know in connection to building or rebuilding their credit. A couple of other great sources to check out include http://www.daveramsey.com/home/ or http://www.crown.org/.