Building up your credit will take work and time. But knowing where to get started is key
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Credit history a little on the feeble side?
If you’re new to credit, you might not have enough of a history to get the great deals that you want. Or even generate a score.
Here are three strategies to build a history and a strong score:
1. Consider a “credit builder” loan. Think of it as vitamins for your credit score. You borrow a small amount — often anywhere from a few hundred dollars up to $1,000 — from your credit union or bank. As you make payments, you create a record of good credit, says Michelle Dosher, spokeswoman for the Credit Union National Association.
Some versions may require a chunk of (refundable) money as collateral, while others won’t, says Jim Simon, senior vice president and chief lending officer for TCM Bank N.A.To compile enough of a credit history to generate a FICO score, the score used by the majority of lenders, requires a six-month loan history, says Ethan Dornhelm, senior principal scientist at FICO. With the VantageScore, you’ll have a credit score after one month, says Jim Akin, senior manager of digital communications for VantageScore Solutions.
2. Get a “starter” credit card. Some institutions, especially credit unions and community banks, offer cards specifically for people who are so new to credit that they don’t have a score, says Simon.
Credit lines are lower, often $500 to $1,500, he says, and interest rates are higher, frequently between 18 to 27 percent.
The good news: A credit card will likely help you build a higher score than a loan. Both the FICO and VantageScore formulas prefer revolving credit such as credit cards to installment loans (auto loans or personal loans), according to representatives with both companies.
The bad news: If you want to build the best scores, you need to keep your balance as low as possible. The best scores go to those who use less than 10 percent of their credit limits, says Dornhelm.
The wisest choice is to use the card, keep balances low and pay it off in full each month.
One option that keeps credit utilization low is to pay off balances as you use the card, sending in your payments multiple times throughout the month, says Barry Paperno, who writes the weekly “Speaking of Credit” column for CreditCards.com and is a former credit bureau industry executive.
3. Opt for a secured card. If you can’t get a conventional card with a small credit line, this option lets you give the lending institution a deposit that could be as much as your credit limit. You still pay the bills each month, as you would with a regular credit card. And when you close the card or convert it to a traditional credit card, you get back your deposit (provided you don’t owe anything on the card, of course).
If you’re shopping for a secured card, do your research to be certain you’re getting a legitimate credit card, not a product designed to maximize fees, says Simon. At the most, you should pay a deposit and possibly an annual fee, “and that’s it,” he says.
Also understand exactly how and when you’ll get back that deposit, he says.
If you’re looking to strengthen your credit history, make sure the card actually reports to the credit bureaus every month. That’s what will enhance your history enough to generate a score.
Comparison shop for a card that has the fewest fees and the lowest charges on the fees it has, says Simon. Prioritize fees over a low APR, since if you don’t carry a balance, you won’t have to pay interest, he says.
What you might not know: Neither the FICO formula nor the VantageScore formula differentiates between secured and unsecured credit cards, according to execs with both companies. As long as you treat your cards right, your score will benefit equally from either one.