Having a stellar payment history and a good credit score above the mid 600’s will prove to creditors you are going to pay them back. Thus, giving you better interest rates and more favorable terms when you’re ready to finance big-ticket items such as a home, boat, motorcycle or new car.
But what if your credit score is not up to par?
We’ve all been there before; you get denied on a credit application because you don’t have enough credit history. Or worse, you have too many bad marks on your credit report such as missed payments or written off accounts (which will eventually roll over to a collections agency.)
The worst blow of all is you’ll be waiting for about seven years for those late payments and charged off accounts to roll off your credit report.
If you decide that credit repair is not an option for you, it’s not the end of the world. All you need is the mindset of someone who just filed bankruptcy or who has zero credit established.
Then think about the following:
The only way to get your credit score high again is by getting new accounts and building a positive credit history.
Then, just let the old accounts charge off. HOWEVER! This can be a frustrating, time-consuming process, that could drag on for up to 7 years. For someone who just filed bankruptcy or who has zero credit established, the challenge of getting new credit is the same; they just don’t have to worry about those old accounts hovering above them.
The secret for fast-tracking your success with building up a positive credit history is this: You have to find the credit card, and loan account offers that provide the highest chance for you to get approved while having the bad credit.
Once you have some new credit accounts reporting a strong on-time payment history, you can start enjoying all the benefits of having good established credit.
- Low-interest rates on credit cards and loans
- Better chance for approval on credit cards and loans
- More negotiating power
- Get approved for higher limits
- Easier approval for renting a home or apartment
- The best car insurance rates
- Getting a cell phone on contract with no security deposit
- Avoid putting down a security deposit on utilities
- Most Importantly, Bragging rights!
These benefits will probably kick in after a period of 1 year, but two years is most likely. After that, you should begin to feel much more confident about filling out a credit application and having a higher chance of approval.
I can’t make any guarantees of course, but in my experience, things get better. I’ll explain more below!
When I was younger, I followed the above steps to establish my credit, and at the time I didn’t even know it! And you know what? It worked for me.
When I first turned 18, getting new credit was tough. But with enough persistence and rejection from various lenders, I finally buckled down and asked my older friends where they got their first credit card. I kept hearing to try at Macy’s. I applied and got approved for an unsecured Macy’s department store credit card with a 100 dollar limit.
After using it and paying it off every month, I was finally able to build up some creditworthiness.
After a few months, they bumped up my available credit to 500 dollars. My credit score went up from a 600 to a 640 in just three months. Then I got another credit card. After one year my credit score was a high 680, and I was able to get my first mortgage to buy a home.
After that, I finally bought my first new car. Then after two years of on-time payments, I was at a 720 credit score.
Now think about this for a moment!
After the 2008 recession, a lot of people had to rebuild their credit from bankruptcies, foreclosures, and written off mortgage loans and credit accounts.
Can you imagine what a bloodbath that was?
Essentially they are starting the same credit building process all over again like an 18-year-old! It happens to all kinds of different people at different ages, and the basic principles are the same every time.
The difference now is that there are many options that exist to establish or rebuild new credit besides a lousy Macy’s credit card. With the power of the Internet, exchanging information and researching new ways of obtaining credit has never been easier! That’s what we’re going to cover in the rest of this guide, so you don’t have to settle for just a lousy department store credit card like I did.
So now that we have the basics covered, there are some good habits you need to develop for building and maintaining good credit.
We’ll discuss that in the next section.
1) Good Habits For Building Credit
Good Habit #1: Limit Your Applications, Chose Wisely
Every time you apply for new credit you get a ding of a few points on your credit score, whether or not you get approved. This is because of a hard inquiry so open your credit accounts wisely.
Department stores are always pushing you to sign up for a new department store credit card to save 10% on a first purchase. It’s best to skip this kind of sign-up offer, especially if you’re just doing it for the discount.
Also, when you’re shopping for a big ticket item and need a new loan, be wary of getting too many pre-approvals, that will also ding your credit.
For Example – You’ll be out shopping for a new car, and you’ll want to test drive the car. Some dealers won’t let you test drive the car unless they pull your credit and pre-approve you. Never let them do this! I’d just walk off the car lot and go somewhere else to buy that new car. Sometimes your best bet is getting a pre-approval ahead of time from a credit union, then using that to buy the new or used car. If they insist on pulling your credit, show them the approval letter provided by the credit union.
A hard inquiry can stay on for up to 180 days., but your score should start improving over a short amount of time.
Sometimes, a unique situation may require you to get more than one pre-approval when shopping around for credit. Such as when you’re doing a refinance on your home, and you need to find the best rate. If you must do this, do it in a short period of time instead of spreading it out, the inquiries will look better to an underwriter.
It will look best if the inquiries are all for the same type of loan too.
Good Habit #2: Building A Strong Credit Age
The basic building blocks of creating a high and stable credit score is showing a history of reliable on-time payments to your creditors. The more time you can demonstrate this, the better it looks to lenders and the credit bureaus.
Thus, your credit score goes up. Generally, two or more years of recent on-time payments will look the best. Also, try not to close out good standing credit accounts that show a long payment history. This can drop your credit score.
Below, in the next sections of this guide, we’ll discuss some programs that will help you build up a solid credit history, that will age very nicely.
Good Habit #3: Low Credit Card/Revolving Line Of Credit Utilization Ratio
Try not to exceed 30% of your available credit line, for your credit cards or other revolving lines of credit. For example, if the credit line is 1,000 dollars, don’t ever use more than 300 dollars of it. Above 30%, and your credit score could go lower.
Be especially careful with large balance transfers, which can really max out a credit line fast.
The lenders will hate it when you pay off your credit card balance every month; I do it anyways. I’ve seen credit scores bump up much faster as a result because it keeps the utilization ratio at almost 0%. Plus making the minimum monthly payments will cost you a lot in interest payments!
Good Habit #4: Consider Auto-Pay On All Of Your Credit Accounts!
Setting up auto-pay will force you to make on-time and consistent payments to all of your credit accounts. Just make sure you maintain a sufficient cash balance in your checking account to cover the estimated amount of monthly payments that will go out. It’s also not a bad idea to set up overdraft protection on your checking account, just in case!
Minimum Payments Warning
The auto-pay amount set up for your credit card and revolving line of credit accounts will most likely just cover the minimum payment that is due. So remember also to make the extra payments manually to pay the down principal balance when needed. REMEMBER! You want to keep that credit utilization below 30%.
Quick Tip: I like to carry a max of two credit cards with me at a time. This little trick prevents you from overspending and will make it much easier to track and send payments out. In fact, to make your life simple, you may only want to consider just having a max of 2-3 credit card accounts, period!
Getting A Credit Card or Revolving Line Of Credit
Credit Cards or Revolving Lines of Credit (LOC’s) are one of the most common ways of rebuilding or establishing new credit.
Prepaid Credit Cards are not, however!
Below we’ll cover each one in a bit more detail. You want to maintain at least 3 – 4 credit cards so that if you ever decide to close one out, your credit won’t take a big hit because you’ll have other accounts reporting to your credit report and sustaining your credit score.
Prepaid Credit Accounts (no advantage for rebuilding credit)
These work more like gift cards or debit cards. They have high fees and are usually offered by big companies like WalMart, GreenDot, and NetSpend. They don’t offer any advantages for rebuilding credit. The big reason for this is that they don’t report any payment history to your credit report. Just skip that as an option.
Secured Credit Cards
Secured credit cards can be a great start. You basically just secure the credit from the card with a deposit into a checking account. This secures the credit with cash and your issued a credit card you can use for purchases. You pay the payments every month and start building up a new payment history.
You can start with 100 dollars or more typically. After about 12 months the bank who issued you the secured credit ) card might even convert it to an unsecured account.
The downside of this option is a secured credit card signals bad or no credit; I recommend this as a last result only if you can’t qualify for an unsecured credit card.
Unsecured Credit Cards
Out of all the credit cards, unsecured ones are the types of credit cards most people get and will build your payment without requiring any type of upfront deposit money. And it will look the best on your credit report!
If you have bad credit or new credit, you will most likely have to pay a higher interest rate and some type of annual fee. If the interest rate is high it will not matter if you follow the good habit of paying off the balance in full every month. And not utilizing more than 30%!
Revolving Lines Of Credit (just a bigger credit card account)
A revolving line of credit comes in many forms. Typically the higher dollar limit accounts of $25k or more will be secured with property. A home equity line of credit (HELOC) is probably the most common type of revolving line of credit. A lot of small businesses will also get a line of credit to cover operating expenses when cash flow can fluctuate each month. It operates the same as a credit card because you can draw from it, then pay it back, then take draw again until your limit is reached.
What happens next?
As you obtain new credit accounts and your payment history creates a stronger credit history and higher score, you’ll eventually be able to get cards with no fees, high rewards, and low-interest rates.
In fact, at some point, the banks may be begging you to take their card by offering low-interest balance transfers and a whole bunch of other perks.
Rebuilding your credit is a great strategy for credit building. Remember to use it repsonsibly.