Building Credit the Right Way
Bad credit closes doors, great credit opens them: but what if you have no credit? Do you not get a door at all? Graduates, millennials, and divorcees whose spouses handled all the credit building payments are only some of the people who might not have a credit history.
Why is Credit History so Important?
Without a credit history, you are essentially a ghost in the credit world, invisible to lenders who are looking for a picture of your past credit history. A credit score is a three-digit number created through secret proprietary formulas that represents the likelihood that someone will repay a loan.
If you do not have a credit history, then a lender cannot predict whether you will pay them back. For that reason, no credit is often treated as bad credit or worse. It can be hard or impossible to rent an apartment or buy a car if you have no credit. To protect their assets, lenders are cautious and assume that you will not pay them back.
Building Credit the Right Way
As we said earlier, good credit opens doors. If you don’t have a credit card, you can’t rent a car if you travel. Using a debit card at a hotel (that allows reservations without a credit card) will usually leave you with a large hold on your account for incidentals. Interest and fees on loans will cost you more. Take these steps to build credit the right way:
- Open one line of credit. Getting a credit line can be hard to do if you have no credit, but you still have options. A secured credit card is one way to guarantee approval and start to build your credit history. A secured card is a credit card that you pay a deposit on before you are granted credit. The size of your deposit determines the credit limit of the card, a $500 deposit will give you a $500 credit limit, etc. Some cards will return your deposit after you have built sufficient good history with them.
- Use your credit wisely. Having a credit card that you do not use is not going to help build your credit history, you have to use the card appropriately to show you can borrow and repay. Calculate what 30% of your credit limit is, and then keep your monthly purchases below that amount. Pay the bill in full every month. Paying in full will keep you from paying interest on your purchases, and will show lenders that you use your card responsibly.
- Take your time. Every time a lender pulls your credit score, your score will temporarily drop for a couple of weeks. Applying for multiple cards and loans over a short period will hurt your credit more than an application a few times per year. When you apply for multiple cards or loans lender, assume you are desperate for cash and will not be able to repay it.
- Get aged tradelines. If you need credit history fast, aged tradelines may be able to help you. Being added as an authorized user on a tradeline in good standing can help you get a quick boost.
These same tips apply to people with poor credit who may need credit repair services in Dallas. Download our free checklist for steps you can take today to ensure you don't damage your credit.