Credit - We constantly hear how important it is.
So much so that many credit cards and financial institutions will now provide you with your credit score, but what does it mean? Depending on who you talk to it can mean different things, but we can all agree that it's a critical component to obtaining a line of credit.
Your credit history is essentially a record of your ability to repay money you've borrowed. On-time payments will help increase your score and delinquent payments will decrease your score.
If you've never had a credit card or a loan (car loan, signature loan, etc.) your credit is currently a blank slate. However, don't panic. This means you get the opportunity to build your credit from the bottom up. Follow these steps to ensure that you are on the right track to a praise worthy score.
A secured credit card acts just like an unsecured credit card (what most people think of when you say "credit card,") however, it's held (or secured) by a security deposit that you provide, typically anywhere between $300 and $500. Your credit limit is often this amount or a percentage there of. A good place to get a secured card is from the credit union or bank where you already do business.
It's common for people to confuse a debit card and a credit card. A debit card, provided by banks, does not report to the credit bureaus. A debit card is merely a way to access funds in your bank account, and can be used like a credit card, with one important distinction--a debit card pulls against the money in your bank account. A credit card pulls against a line of credit. There are three major credit bureaus that track credit history: Experian, TransUnion, and Equifax. If information is not being submitted to at least one of these three bureaus it is not affecting your credit score.
Start small. The point of having credit is to prove your ability to pay back debt. An important phrase to remember is to use credit regularly but sparingly. Your goal is to prove to creditors and lenders that you can responsibly handle your finances and money borrowed. Even if you can only afford to charge $20 and then pay it off, this will still make a difference in your credit worthiness. It's not how much credit you have that matters but how you handle the credit that you have.
It's not just enough to open up a credit card to keep on hand for emergencies. You need to be using it, charging small balances, and paying them off in order for your responsible actions to report to the bureaus. The golden rule is to never have a balance on your card that is greater than 30% of the limit. For example, if you have $500 limit, then you should never have a balance greater than $150.
This rule is critical. Even one delinquent payment can drastically reduce your credit score. Even if you miss your payment date by a few days still hurry to pay the bill. Most delinquent payments won't report until it is a full 30 days late.
You want to build your credit score, and you're excited to do so, but don't go applying just anywhere for a line of credit. Each time you inquire about a new line of credit that creditor reports it to the bureaus and you take a small hit on your credit score. Whether you are granted the line of credit or not it will show up on your report and multiple inquiries will bring down your score vastly over time. The one exception to this is if a mortgage lender checks your credit. If a mortgage lender checks your credit additional mortgage lenders can also check your credit for up to 45 days later and the subsequent inquiries will have no additional effect on your credit report. For more information on credit inquiries by mortgage lenders check the Consumer Financial Protection Bureau's website.
You have to first prove that you can handle one to two lines of credit before anybody is willing to give you more. Use the secure credit card(s) for at least six months before going to apply for anything else.
After six months of on-time credit card payments, check your credit score online by pulling a tri-merge report (meaning all three credit bureaus). There are a few sites that let you check and manage your credit report for free. A quick internet search will give you some good options, but look for those that specifically mention your FICO score.
First take a look at your score. Most lenders will consider the middle score of the three credit bureaus, this is known as your mid-score. Your credit score can range anywhere from 350 to 850. You typically need over a 620 to get a home loan and over 750 is considered very good credit. However, this is one area where RANLife sets itself apart. Every situation is different. We are specialists in working with low credit. If you have compensating factors, you could be approved with a score of 500 or better.
After one year of following all of these steps you should be ready to apply for a regular credit card. In some cases, the creditor of your secured card can switch it to an unsecured card for you. If not, try applying for a credit card through your local bank. There are also credit cards where you can earn back rewards such as cash back or mileage points. Check out your options and decide what is best for you.
The key to credit is time and patience. It cannot be built overnight. With a little work and practice, obtaining a stellar credit score does not have to be far from reach.
One of our loan specialists can help you set up a plan to get you and your credit from where you are to where you want to be!