Establishing Credit... the Right Way!

/

Do me a favor:  Head to Google.com and search for “build your credit”. Once you hit “search”, I bet it’s no surprise that in under 1 second, about 50,000,000 results can be found. And if you’ve never had a credit card or a loan, your credit history is most likely a blank slate, leaving at least half of your search results inapplicable. Your credit history, as documented on your credit report, is a record of how responsibly you’ve repaid the money you’ve borrowed… and creditors and lenders use your credit history to make decisions about whether or not to give you a credit card or extend a loan. If you have no credit history, however, there’s no record of how you might manage debt. And as a result, many creditors and lenders won’t lend you money. The quickest way to build good credit is by using a credit card, but you can’t get a credit card without good credit. So what can be done to establish credit? And how do we find out if it’s working?

Become an Authorized User on Someone Else's account

To become an authorized user, a person (usually a family member or significant other) grants you permission to use his/her credit card account. Authorized users can be added to bank accounts and loans for withdrawing, depositing and transferring funds to and from their account… but unlike joint account holders, are not responsible for paying the bill on the credit card or loan account; the repayment responsibility remains with the primary account holder.  As an example, my daughter just graduated college with a great credit score because my wife opened a couple of credit cards, in her name with my daughter as the authorized user, when she started college.  So when she graduated, she had 4 years of excellent credit and now a great score.

Find a Secured Credit Card… and Apply for it!

A secured credit card is a great tool to use when attempting to establish credit. It functions just like any other credit card in the sense that when you use it to make a purchase, you’ll then make payments on that purchase on or before the due date, gathering interest if your balance is not paid in full. The most unique thing about them is the fact that you’re required to place a refundable security deposit when you apply. If approved, your credit limit will generally equal the amount of that deposit, which the issuer will hold as collateral until you close your account. If your application is rejected, you’ll get the money back right away.

All major secured credit cards report account information to at least one of the big three credit bureaus on a monthly basis, and that’s all the opportunity you need to improve your credit score. As long as you pay the bill on time every month, positive information will flow into your credit reports, building a track record of responsibility and covering up mistakes from the past, if applicable.

Get a Co-Signer

While a secured credit card is a great way to build or repair your credit on your own, you can also apply for an unsecured credit card using a co-signer. The co-signer agrees to pay back debt in the case that the borrower is unable. This may include any late fees and collection costs, on top of the full amount of debt. If you do plan on applying for an unsecured credit card by means of a co-signer, make sure you use it responsibly, paying your balance early or on time and never charging more than you can pay back.

Check your Progress by Checking your Credit Report and Score

After six months of timely credit card payments, check your status by viewing your credit report and score. Pay special attention to what is on your credit report and any positive or negative factors listed, so you have a better idea of what you need to work on next. Also make sure to take a look at your credit score – it will help you make sense of your credit report and give you an idea of how well you’re doing.

There’s a lot to keep track of, but with some strong focus and planning, you can stay on top of your finances and greatly improve and establish credit. After a year of paying your bills on time, potentially adding a new form of credit and removing any errors from your credit report, your credit could look vastly different. If you or your client’s goal is preparing your credit to be a first time home-buyer, by following just a few simple steps, you’re that much closer in making that goal a reality.

Cracking the Credit Code: How to Supercharge Your Score

/

If you’ve ever been in the market for financing, chances are your full financial profile was examined by a lender. And if you’ve ever been prequalified for a loan, the inspection of your employment income, credit, assets, and debt-to-income ratio most likely laid the groundwork in determining your candidacy. But despite all four items, did you know your credit has the most pull in determining your eligibility (or ineligibility) for financing?

While your credit score is just a number, chances are it’s already had a measurable effect on your wallet. And when it comes to borrowing money, your credit score is one of the most important factors in determining which rates you will pay on everything from a business loan to a mortgage. Doesn’t seem too scary, right? Well, look at it this way: If you have a poor credit score, you could end up paying hundreds (or even thousands) more in interest over time on anything from credit cards to an auto loan. So how can you tell if your credit score is “good”, and what should you do if it’s in need of some serious improvements?

If you’ve never actively worked to improve your credit, a credit score may seem mysterious or enigmatic. You may understand that scores run from 300-850, but that’s where the credit knowledge of most consumers ends. And when you don’t quite understand the way something works, it’s easy to assume you have little control over it, or in this case, where you fall on the credit score spectrum. In reality, however, your credit score is based on very real and measurable criteria… and you have the complete power to change it. In fact, most consumers are in a position to improve their credit with very little effort. 

fico.png

The breakdown.

FICO is the biggest name in town when it comes to credit scores. Most major card issuers and lenders in the U.S. use FICO’s traditional model to decide whether to extend credit to consumers and at what interest rate. Using the information in a borrower's credit report, FICO breaks that information into categories. Those five components each get different weights.   

Recently I came across an article titled, “How Your Credit Score is Calculated” by personal finance writer Miriam Cross of Kiplinger Magazine. Miriam’s article, which you can access here, outlines each credit-affecting factor in your financial life, and details how to positively steer each factor in the direction of an improving credit score. It also proves to be the most concise credit guide I’ve ever had the pleasure of finding and I felt compared to share it with you.

Let me ask you something— when was the last time you checked your credit score? And if your answer is, “I haven’t”, did you know that several credit card issuers and personal finance websites such as Credit Karma allow their users to frequently check their credit score at no cost? Seriously. It’s free. It’s also seriously imperative to understand how to go about improving your credit score, especially if it’s not up to par (and there’s always room for credit score improvement, anyway).

As a mortgage advisor and loan originator who aims to educate, advise, and inspire, it is my goal is to do all that I can to help potential borrowers find their footing along the path to home-ownership. And with that, I’d like to share some important tips, many requiring little effort, that allow potential borrowers, or anyone in need of financing, increase their credit score. You may also reference the linked article above for a more detailed explanation of each:

  1. Make your payments on time and for the right amount – every month.
  2. Avoid over-extending your credit, and stay away from unsolicited credit cards as they won't benefit in any way to your credit score.
  3. Don't ignore your overdue bills, and if you face any problem regarding repaying your debt, contact your creditor for repayment arrangements.
  4. Be sure of what type of credit you have, as credit from some financing companies can affect your score in a negative way.
  5. Try keeping your outstanding debt as low as possible – particularly on revolving debt (credit cards). Extending your credit close to your limit constantly is considered to be bad and will reflect negatively in your score.
  6. Restrict your number of credit applications as a credit report having many hits (credit inquiries) is viewed poorly.  In other words, the more times you let people pull your credit, the worse your score is likely to be.  But not all hits are considered to be negative, like monitoring of accounts, prescreens, etc., are viewed positively.

Your credit score plays an important role in your life that can put you on the right path towards financial success, or even simply veer you off course.  When you improve upon your credit score, you are also improving upon your confidence… and with confidence comes the power to seek out and follow through with the goals you strive to meet. Besides, if you are one of the 8 in 10 Americans who consider owning a home as part of the American dream, are you really going to let something as easily changeable as a credit score hold you back?