June 13th, 2008 by Kenneth Long
If you have no credit history, it can be difficult to prove that you are a good credit risk. It is not true that no credit is as bad as poor credit. However, it can still be hard to establish credit from scratch. Here are some steps to help establish credit.
Open/Maintain a Savings Account
Even though a savings account (or checking account) is not reported to credit bureaus (excluding outstanding overdrafts), it can help you establish credit. Some lenders want to know what balances you have in depository accounts to measure your financial stability. Having a couple hundred dollars or more can help show that you have reserves to protect against financial hardship.
Additionally, maintaining a savings account can establish a form of internal credit. The bank or credit union with which you maintain a savings account in good standing will be more likely to approve future credit requests if they see you have properly maintained your deposit accounts.
Open a Secured Personal Loan
Once you have established and maintained a relationship with your financial institution, they can help you build your credit history. Most banks and credit unions will want you to be a customer for at least 6-9 months before approving new credit requests.
One way to improve your chances of approval is to work with your personal banker to secure a personal loan with collateral held at the bank. A 1-year certificate of deposit (CD) can be obtained from your banker and pledged as collateral for a personal loan. In many cases, a loan for as little as $1,000 can be obtained using a matching CD purchase.
The bank essentially has zero risk, and some of your loan interest can be offset by the interest earnings on your CD. Making on-time payments every month will establish a payment history. If you would like to repay the loan sooner, that can help you save money on interest while eliminating the debt. The result is a positive credit account that can be reflected on your credit bureau reports. Just make sure that your bank or credit union reports to at least 1 or 2 of the major credit bureaus.
Open a Store Credit Account
Store credit cards are easier to obtain than major credit cards. However, they also do not help your credit as much.
Still, you may open one card account and make a small purchase. You should immediately pay off the balance to ensure that your payment is on-time and to prevent finance charges from being incurred. A small purchase every 6 months or so can help keep the account active.
Open a Major Credit Card Account
You will likely want to open one major credit card as a way for establishing a major trade line on your credit report. Similarly to the store card, you will want to make a small purchase periodically on the card, but immediately repay the balance so that no finance charges are incurred.
It takes at least 2 years before credit accounts are considered seasoned. Applying for a car loan or home mortgage may still be difficult prior to reaching this point in time.
Installment loans can further help build your credit. However, the purpose of getting good credit is to be able to buy larger items on credit at good terms. It is not the other way around as many shady car dealers claim.
If you need to buy a vehicle, reduce the urge to buy an expensive car. A large down payment can help you get a smaller loan with a better interest rate. Paying off a small installment loan can quickly help your credit score reach near 700 or higher.
Once you have established great credit, you are now in a position in which your credit will help you gain approval for a home mortgage. Mortgage lenders will like that you have maintained good payment histories with your major credit card and your vehicle loan.
Your lower interest rate can save you hundreds of dollars each month on interest and can give you a much lower monthly mortgage payment. This can help you save more money and reduce your reliance on credit for other purchases.
If Your Application is Denied
If at any point your loan application is denied, it likely means that you will not be approved by one of the financial institution’s competitors either. Reduce the temptation to file multiple loan applications when one is denied. Multiple hard inquiries can further reduce your credit score.
Instead, it is an indication that you are not yet ready for the credit account. Maintain proper on-time payments for your current debt obligations to gradually build more credit over time. Eventually, your scores will improve and you will be in better position to buy on credit.
This entry was posted on Friday, June 13th, 2008 at 11:06 am and is filed under Credit Scores. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.