Attempting to establish good credit is a task that takes a little effort, a lot of time, and can even cost some money! In order to establish good credit you have to use credit, and this almost always means incurring an interest charge. Fortunately, you can use these strategies to keep your interest payments down while getting the biggest boost to your credit scores.
To establish good credit, you simply need to jump into the credit cycle. You first acquire some credit, use it when needed, and repay as required. After a period of this activity, you acquire some more; use it when you need it, and so on...
By making small charges to your account and paying them on or before the due date, you slowly build your credit and become eligible for credit line increases. Its okay to pay personal consumer accounts on or right before the due date, but you’ll get an even better credit rating for business accounts if you make your payment right after you receive the bill, versus waiting until closer to the due date.
In most cases, you can set up your payments to be deducted automatically out of your checking account on the due date. If you pay off your balances in full every month, this ensures the credit bureaus will always show a balance on the account, and also allows you to keep your money until the exact day the payment is due. If you pay off your balance too far ahead of the due date; it may not reflect on your credit report, which doesn’t help your scores.
You continually increase the quality of your credit as well as the quantity. You’ll replace store charge cards with those from major imprints, such as Visa, M/C or American Express. You’ll convert secured lines of credit to unsecured ones. You’ll increase your borrowing power with your relationships. Before you know it, you have built substantial credit coffers.
Well start from the beginning, with steps to establish or re-establish credit for someone who has no or formerly bad credit. If you already have credit, the challenge is to make sure your credit grows in the ways you need it to for your business.
1. Open a checking account. Use the account regularly and don't bounce any checks or fall below your minimum balance and you can use this account as a credit reference.
2. Open a savings or money market account. Just having a savings account says to a potential lender, "I think about saving money". If you are still practicing get out of debt strategies, add just the minimum to this account every month (Pay Yourself First!) until you are through with your debt reduction program.
Add small amounts to this account regularly and keep it above the minimum balance. This is a great place to put the funds from Paying Yourself First. Don't withdraw the money!
3. Credit Building Fast - Three loans, three banks, three months! For fast track credit building, you will need to spend a little money. First, locate three local banks or any size that report their accounts to a credit agency. Go ahead and tell the banker that you are looking to build credit for yourself or your business and make sure they report to at least one, or better yet, all three of the major credit reporting agencies.
Take some amount of money—as little as $1,000 will work. Deposit that money into a three month CD at Bank # 1 and take out a line of credit secured by the CD. Banks will routinely make this transaction, since they have a completely secured loan at this point.
Take the $1000 you borrowed and go to Bank #2 and do the same thing. Repeat the process in Bank #3.
You can do this for as many banks as you can afford the interest payment on for those three months, plus any loan fees you are required to pay. Make sure that none of these loans has a prepayment penalty. Finally, deposit the money into a savings account and don't touch it.
Spend three months paying the bill on these loans on time. Some say that making triple the monthly payment will grow your credit faster, but a single payment is sufficient.
At the end of the three months, withdraw your $1,000 from the savings account and use it to pay off the first loan, and then cash out the CD. Take that money to the second bank and repeat the process. You now have three satisfactory positive credit accounts on your credit report.
While this is a powerful and proven method for rapidly growing credit, there are a few drawbacks. First, it will cost you money. Your secured loans will have an interest rate between 5-10% and you’ll be paying that three times, or 15-30% annualized interest. Since you are using this strategy for at least three months, you could be paying $300 to grow your credit.
The second drawback is in using the CD to secure the loan. Although the bank will like this better than a passbook savings, a CD does have an automatic rollover provision. If you don't liquidate one of the CDs along the chain in time, you may not have the funds to pay off the loan and incur the interest for a much longer period of time. With proper timing of the accounts, you can entirely mitigate this risk.
4. Apply for a department store or oil company card. These are much easier to get than a VISA or MasterCard. You can start with a small credit line. Be sure to do this when you are making an already scheduled purchase, since you will often receive a discount on the bill at that time.
Use this card every month for a purchase you are already going to make. For this reason, cards like Target that have household items are a good choice for establishing good credit. Office supply stores are a great one for business credit building. Pay the bill on time, every time, to prove your credit worthiness. For these types of cards, never carry a balance. The interest rate is just too high!
5. Get a secured credit card. After keeping your account current for a year, ask them to refund your deposit. If you simply had little credit, but not bad credit, you may skip this step.
I really struggled with whether to include this among the list of steps to grow your credit. There are so many secure credit card programs that are really financially ill-advised, that their benefit on the whole is questionable.
Be aware that there are high fees on some of the cards that are advertised nationally, and some names of cards are a red flag to lenders and don't help you build credit at all! If you can skip this step, I'd recommend it. However for some of you with really bad credit, it may be a necessary step between a store card and a major imprint card. Make sure you read the fine print and determine what kinds of fees are associated with the account.
6. Apply for a MasterCard. It is rumored in the industry that these are easier to get than Visa cards. Likewise, it's easier to get a card that doesn't give you anything in return, such as cash back or miles. Regularly use the card, and occasionally carry a small balance.
Before you apply for your MasterCard, call a few numbers on the applications and attempt to determine which credit bureau they use to evaluate the credit score of their applicants. Many of the companies will share this information with you. If you can find a MasterCard imprint that pulls credit scores from the bureau you have the highest score with, you increase your chances of getting your application accepted.
7. Keep Credit Inquiries to a minimum. Keep your credit inquiries to no more than 5-7 per year. Your score can drop by as much as 5-10 points every time your credit is pulled, so be conscious of how many inquires are being made.
8. Build your All-Star Credit. Continually work on improving all the elements of 5-star credit by working on improving those 5 Cs: character, capital, collateral, capacity and conditions.
9. Now that you have established a good credit base, continually improve and upgrade your credit sources. If you have a secured card, first ask for a line increase without providing additional security. After a few months, ask for the card to be unsecured or apply for a new card and replace the secured card. Go from retail store cards to national imprints, secured bank lines to signature lines.
10. Work on building a relationship with one or two banks. At the highest levels of credit use, lending is all about relationships. Create a relationship with a bank that's large enough to meet your goals over the next few years, but not too large so that your business isn't important to them. Choose a mid-sized local bank. The longer you establish your credit profile, especially with a particular lender, the wider credit vault doors will open.
The best mix of credit to have is 2 to 3 unsecured accounts, preferably from major imprints, and one or two installment accounts, such as an auto loan or mortgage. Your credit scores like a long history of your accounts, so don’t close old accounts. If you need additional credit, ask for a line increase instead.
Keep in mind that a major factor in trying to establish good credit is to keep your balances at 30% of your high credit limit or below. To eliminate this risk completely, just charge what you can pay off every month and within a couple years your credit will be so good, lenders will be begging you for your business instead of the other way around!
For resources on how to repair your credit, visit: www.RepairCreditTrauma.com
