Credit: It seems like you can't get any credit without any credit history. What are some of the best ways to build your credit, whether you're rebuilding credit after a bankruptcy or just looking to improve your financial wellness?
A little background on what affects your credit rating is helpful before diving into the tips, so you understand the why of what we’re doing. Your credit is a based on a combination of factors, listed in order of highest impact to lowest impact, these factors are: payment history, your credit utilization – how much you use your credit card, whether you have any derogatory marks, your credit age, how many accounts you have, and how many credit inquiries you have.
Working as a bankruptcy attorney meant that I constantly had clients asking me how to rebuild their credit following a bankruptcy. The tips that I provide below will work whether you’ve just filed bankruptcy or are simply just trying to improve your credit score. Considering that most of my clients had just filed bankruptcy they were essentially in the same (or possibly even worse) position as starting from scratch (thus the tips below will be equally applicable whether you filed bankruptcy or not).
Start Building Credit Quickly by Improving Your Payment History
Two great ways to improve your credit start with addressing your payment history. One of the easiest ways to get a good payment history is if someone can add you as an authorized user to one of their existing credit cards (a parent perhaps?). Generally, adding an individual as an authorized user will make it so that the credit card company will report that user’s credit usage information to the credit bureaus. The information includes payment history, age of account, and credit utilization; caution however, because I’ve seen this go both ways, if you get added to someone’s card that has lots of missed payments or keeps their credit card maxed out, it can hurt your credit. The other option that doesn’t rely on the goodwill of another would be using something called a secured credit card (if a normal credit card is not an option).
Secured Credit Card – When a person has very little (or very bad) credit history, there will not be a lot of options in terms of the types of credit available. A secured credit card requires that you provide collateral in the form of a cash deposit; for example, you provide a cash deposit of $1,000, and then get a secured credit card with a $1,000 limit. Banks are willing to do this because it presents very little risk for them. You’ll want to get a secured credit card that has a low (or no) annual fee and other favorable terms like a low annual percentage rate (APR).
Here are a few good secured credit card options with no annual fees; you also might want to check with your bank to see what options are available. Unfortunately, there is not any great options in terms of APR. However, if you pay the credit card in full each month, then you will not have to really worry much about the interest rate.
- Discover It Secured Credit Card – Nice because there is no annual fee, and you can get cash back at 1% on all purchases and 2% for select categories.
- Citi Secured Credit Card – No annual fee, however no cashback options
- Capital One Secured Mastercard – No annual fee, however no cashback options
When using a secured credit card, or any credit card for that matter, it is important to start building a positive credit history. The proper way to do this is to make small charges each month then pay off the entire balance. I say pay off the entire balance, because this allows you to avoid paying the high interest associated with credit cards, and it also keeps your credit utilization low.
Credit Monitoring is Necessary to Ensure Good Credit Health
There are a lot of good reasons that you should be checking what gets reported to the credit bureaus about you. You can ensure that you are indeed paying your bills on time, and more importantly, that creditors are reporting correct information. Also, credit monitoring is one of the first places people become aware of identity theft (as they start seeing new accounts show up under their credit report).
Monitoring your credit is easy, because you can request your credit report from each bureau (there’s 3 main ones, Experian, Equifax, and Transunion) once a year from annualcreditreport.com, a government run service that is free. This service will not provide you a credit score but rather gives you a report with all your account information and payment history. A good tip is to only request one at a time and space out your requests so that you can check your credit report every 4 months. Another great service is CreditKarma.com which has a partnership with Equifax and Transunion and provides you access to your credit report on a more regular basis.
If you have additional tips to improve credit, feel free to comment below.