Having no credit is often just as problematic as having bad credit. When you have good credit, you are able to show a bank or lender that you are a great risk, that you always pay your bills responsibly, and that you are committed to returning the money that is lent to you. Even if all of these things are true, but you have never had a credit card or loan, then a bank is unlikely to take a risk by lending you money. They can’t just take your word that you have every intention of paying them back responsibly.
Fortunately, you can build your credit—even if you are starting out with none. Here’s how to get started on the right track, and get your credit history built up to something that you can be proud of—and that banks know they can count on.
Apply for a Secured Credit Card
A secured credit card works like a regular credit card when you use it to make purchases, but you are required to make a security deposit in order to get approved for the card. The deposit is usually somewhere around $300-500, and this will typically get you around a $450-750 line of credit to use. Keep in mind that a secured credit card is not a debit card. You will not be spending the money that you put down as a security deposit.
You will still be expected to make payments on the credit card, just like you would for any other traditional credit card. This is how you will build up your credit, since your payment history will be reported to the credit bureaus. A debit card is different, allowing you to withdraw funds in an account, but only the funds that are actually in the account at the time of the transaction. There is typically no extension of credit for a debit card.
Wondering which card to choose? Check out our post with the Top 5 Secured Credit Cards of 2014.
Keep Spending In Check!
As with any credit card, it is important to monitor your spending carefully. You should never be spending more than you can afford to pay back. A good rule of thumb is to never charge more than 50% of the maximum that you can charge, according to your limit. Once you get to a point where you have a higher balance on your credit card than you can afford to pay back, you run the risk of entering a very difficult financial cycle—one that could land you in hot water and cause your credit score to tank. You need to keep spending in check, and stay within your budget to show the credit bureaus that you are responsible with your money. If you pay off your balance each month, you will find that you build up a great credit score very quickly.
One thing that it is important to understand is that it takes more than just being approved for the secured credit card and getting it, you actually have to use it if you want it to help your credit. The credit bureaus are looking for you to be making regular payments. This makes it important for you to make at least occasional purchases and pay them off. Don’t just let the card sit around, unused!
Never, Ever Make Your Payments Late!
One thing that credit bureaus consistently frown upon is late payments. When you make late payments, you appear highly irresponsible to the lenders. Now, late payments are certainly better than no payments, but you really should make sure that your payments are always made in a timely manner. Send them in a few days before they are due to ensure that they arrive on time, even if you pay electronically and not through the regular mail. Plus, make sure you never bounce a check for a credit card payment—this is a double whammy of bad for your credit report, especially when you are just starting out and trying to build good credit!
When you are trying to build up your credit, you don’t want to rush out and apply for a whole bunch of accounts. Stick to just one for now, and use that to build up credit. Each time you get a new credit card, your credit can take a small hit. When you are just starting out, you really can’t afford any setbacks, even if they are small.
Monitor Your Credit Score Closely
Keeping tabs on your credit score is important. You can opt to use a credit monitoring service to check this for you. It is important to know where you stand, credit-wise. There are some free services that you can use, or inexpensive credit monitoring services available.
How Long Until I Can Apply for an Unsecured Card?
There is no “magic” number when it comes to how long you need to wait, but you should be working as quickly as possible, following these tips, and raising your credit score. Most credit cards that have decent interest rates and perks require you to have at least a 600 credit score. The higher the better, and the higher your credit score, the lower your interest rate will usually be. Some say it takes a year, but it may not take that long if you are very disciplined about your secured credit card use and payments.
Using a credit monitoring service can help you keep close track. There are certain credit cards (e.g., Discover it® and many Barclays cards) that report your credit score to you every month—but, these are not secured credit cards so you might not be ready just yet! But, they should definitely top your list when it comes time to apply for a traditional, unsecured credit card.
When you finally do get an unsecured credit card, you should continue to spend responsibly and show discipline. Never spend more than you can afford, always make your payments on time and keep track of your credit. One thing to look forward to is the great perks and rewards that you can get with some of the credit cards that are available today. So, get to work, and build up a great credit score now!