Over the past couple of weeks, I have shared with you some basic knowledge on credit scores. We talked about where to get your credit report, as well as spent some time on some of the things that affect one’s credit score. You don’t have to have perfect credit to invest in real estate, but it is much easier if you do. So now let’s discuss how to establish or re-build your credit.
Raising your credit score is a long process. It will not happen overnight, but the work is worth it in the end. When applying for credit, it’s difficult to get started if you have a low score or no credit history. However, there are some quick ways you can start to establish or rebuild your credit, no matter how bad or how little credit history you have.
Get a Secured Credit Card
One way to start building credit is to use a secured credit card. This is not to be confused with a prepaid credit card. Prepaid credit cards are similar in the fact that you use your own money, however they do not report any information to any of the credit bureaus. It doesn’t do any good to use a card that is not contributing back to your credit report.
There are many companies and banks that offer secured cards. If you decide that this is the best way for you to improve your credit, make sure that you compare multiple cards before deciding which one to use. Just like with a regular credit card, they each have their own perks as well as downfalls. When it comes to any kind of credit, you want to make sure you know exactly what you are getting into as well as get the best deal possible.
A secured credit card is a lot like a regular credit card. The major difference between the two is that a secured credit card will require a deposit in order to open the account. The amount of the deposit will vary depending on the card and issuer, but there will be a minimum amount that will have to be deposited. It usually ranges between $300 to $500, up to a maximum of a couple thousand, but usually not exceeding $5,000.
With most secured credit cards, the amount of your deposit will be the amount of your credit line. For example, my bank offers a secured card with a minimum deposit of $300, up to a maximum of $2,000. I fill out the application, pay the minimum deposit of $300, and within two weeks, my secured card will arrive in the mail with an available balance of $300. If I pay a deposit of $1,000, then the available credit will be $1,000. Just keep in mind that when building your credit, the amount of available credit on your secured card is not what will make a difference, but using it responsibly and making payments.
Do Your Research
Again, doing your research will pay off when it comes to secured cards. As stated before, each available card has its own positive and negative aspects. Always make sure you look to see what kind of fees will be charged before you apply for a secured credit card. A recent article on foxbusiness.com advises “When seeking a secured credit card, look for one with no annual fee, or a fee of no more than $50. Try to avoid being charged an application fee and be wary of other fees that might be present.” Many times, the fees will be deducted from your initial deposit. If you chose to deposit the minimum amount, these fees can use up the majority of your balance for the month if you aren’t careful. Also, be mindful of the interest rates. These also vary from card to card, and for some cards it can be much higher than average. There are a good deal of websites, such as credit.com and creditkarma.com, that list the best secured cards available, and list all the fees and benefits of each card.
Use it Wisely
Once you decide on the best card for you and your current situation, always keep in mind this is an attempt to improve your credit. It’s always best to use the card for small purchases if possible, and always pay your bill on time. If you can, pay more than the minimum or even the full balance, as this will help keep your credit utilization low. You can also make multiple payments a month if it helps paying the balance down each payday.
As stated in my previous post, it’s hard to know when the creditor will report your balance to the credit bureaus each month. But making multiple payments will help keep your balance low no matter when it is reported. Typically, once you have had the account open and have made on time payments for a certain amount of time, the deposit will be refunded and the issuers may extend an offer for an unsecured line of credit.
Keep in mind, this is just one step in the long journey to good credit. On time payments and responsible use will get you moving in the right direction, but there are other ways to improve your credit as well, and we will talk about those in my next post.