Building a Credit Score from Scratch
by Michelle Black, Creditwriter.com
Perform a quick Google search and you will discover that there is no shortage of articles and ideas online clamoring to offer you tips and pointers about how to best manage your credit. You can find videos, podcasts, and even television shows from many self-proclaimed “gurus” who are quick to share their credit secrets with you. Add in the well meaning credit advice you may have received from your family, friends, and acquaintances and before long your head will be spinning with dozens of contradictory credit improvement strategies.
Unfortunately, the truth is that many self-proclaimed “professionals” and even your loved ones can give really bad advice when it comes to your credit. (To find a NACSO member in your area, CLICK HERE.) Most credit advice is likely given with a very well-meaning spirit; however, bad credit advice can hurt you even if the damage is unintentional. It is important to be careful whose advice you follow when it comes to your credit, especially when you are building credit for the very first time. Here are 3 tips to help you build great credit from scratch.
Tip #1: Do Not Assume Anything
If you are preparing to build credit for the first time you may genuinely believe that your credit reports are completely blank. However, assuming that this is the case without verification is a mistake. You should begin by checking all 3 of your credit reports from Equifax, TransUnion, and Experian.
You are entitled to a free copy of these reports every 12 months from AnnualCreditReport.com. You can also access your 3 credit reports and 3 scores (if they exist) via a variety of credit monitoring services. You should develop the habit now of checking your credit reports often. Although the Fair Credit Reporting Act does give you the right to expect accurate information to appear on your credit reports, it is up to you to monitor your those reports in order to ensure that they remain error-free.
Credit Expert Advice: If you discover errors on your credit reports then you have the right to dispute those errors on your own or you can hire a reputable credit restoration company to assist you.
Tip #2: Establish Revolving Accounts After you have checked your credit reports, if they are indeed completely blank, then you might consider opening a few credit card accounts – aka revolving accounts. Secured credit cards can potentially be a good place to start when you have zero established credit. These types of credit cards typically offer less strict qualification standards when compared with the requirements for unsecured credit card accounts. In other words, qualifying for a secured credit card is generally an easier process even if you have no credit history or damaged credit history in the past.
Credit Expert Advice: Just remember, if you open a credit card account it is absolutely essential that you keep all of your payments on time every single month. It is also a good idea to never revolve a credit card balance from month to month either. If you manage your new account well it has a great potential to help you build positive credit and stronger credit scores.
Tip #3: Establish an Installment Account Credit scoring models such as FICO and VantageScore like to see that you know how to manage a variety of account types. Consumers with a good mix of accounts showing up in their credit histories will potentially be rewarded with higher credit scores. However, a problem which consumers with no established credit often face is the fact that it can be difficult to qualify for certain types of loans with little to no credit. Your solution? Enter the credit builder loan.
Many local credit unions and some online lenders will offer credit builder loans as a means for their customers to rebuild or build credit for the first time. Credit builder loans are generally issued for a low dollar amount ($500 – $1,000) and the funds are held in a savings account while you make the monthly payments to satisfy the loan. Once the loan has been paid in full the funds are released to you, plus any interest earned. If you managed your account properly then you should have around 6-12 months of on-time payment history showing up on your credit reports.
Credit Expert Advice: If you are thinking about applying for a credit builder loan product be sure to ask the credit union or lender if they will report the account to all 3 credit bureaus. On-time payments are also essential, otherwise your new credit builder loan could hurt your credit instead of helping it.
Tip #4: Ask a Loved One for a Favor
Asking a loved one or a family member to add you as an authorized user to an existing credit card account is another potential strategy which may help you to build credit from nothing. Though it is true that authorized user accounts will not show up on your credit reports 100% of the time, in most cases when you are added as an authorized user to a credit card the account will show up on your 3 credit reports within a few months. Plus, if you are a parent then authorized user accounts represent a great way for you to help your children establish credit without dipping your toes into the very dangerous waters of co-signing.
Credit Expert Advice: Before being added to any account as an authorized user you should be sure that the account has a flawless payment history and a low or $0 balance. Otherwise, being added as an authorized user could backfire and hurt your credit instead of having a positive impact.