Start out by getting a credit card
Credit cards make the strongest contribution in every segment of your credit score. They have the strongest impact on the payment history, utilization rate, length of credit history, and credit mix. The problem is, you can’t get a credit card without credit history, and you can’t build credit history without a credit card. You’ll need to trick the system—and we’ve got just the thing.
Open a secured credit card
Secured credit cards are designed to help people with poor credit report better financial behavior. They act like credit cards while bearing no credit risk for the bank. Before giving you a secured card, the bank asks you to deposit a certain amount of cash as a collateral against future credit. The amount of credit available to you will equal your deposit. The usual range is between $100 and $1,000, but keep in mind that if you are actually going to use this card, then maintaining favorable utilization on a low credit limit is going to be challenging. If you can afford to put down a bigger deposit—do so.
Other than the collateral, the card functions just like a regular credit card. It’s useless as a credit instrument (as you are effectively paying to borrow your own money), but the sole purpose of this card is to help you get in the good graces of credit institutions. Bite the bullet, pay the deposit, keep your utilization under 30%, and in about 6 to 12 months, you should see a positive growth of your credit score.
Secured credit card tips
- Look for a bank that offers a credit limit in excess of your deposit, some do;
- Make sure the bank reports secured cards to credit bureaus, some don’t;
- Look for a bank that will upgrade you to an unsecured card after 6-12 months of good behavior, it’s called a graduation option;
- Secured cards compete on annual fees and APRs, but might have hidden costs like application, membership, cancellation, and processing fees. Make sure to factor everything in;
- If you don’t have enough cash for a bigger deposit, ask the bank to spread the payment over several months or make sure the bank will allow you to increase the deposit once you have more funds;
- The best way to use a secured credit card is to set up a small monthly auto-charge and to pay it off right away each time—this way, you avoid high utilization and keep your card active.
Become an authorized user
Commonly known as “piggybacking,” adding an authorized user to an established account with good credit history is a way to “cheat” the credit score. When someone adds you as an authorized user on their credit card, this card then shows up on your report as yours, while also remaining on their report as theirs. This way, if the account is good, you benefit from its age, credit limit, and low utilization. At the same time, your score will also take a hit if the principal user misbehaves.
The practice originates from parents sharing their accounts with children and spouses sharing accounts between themselves, but is really open to anybody adding anybody else. Unfortunately, it was aggressively abused by scammers, who offered authorized user status on their accounts for a fee. To put an end to cheating, banks have stopped reporting authorized users to credit bureaus unless they believe an authorized user is actually a close relative. So, if you want to be reported as an authorized user, then your best bet is a close relative—and their credit history better be good!
Authorized user tips
- Authorized users are issued a copy of the card and may use the credit, but are not legally obligated to make payments on this credit. For credit score purposes, it’s better to cut the authorized card up right away—you don’t have to use it to have it show up on your report, and the principal user might feel better if you don’t have access to their funds;
- Some premium cards will charge a fee of up to $200 for adding an authorized user, but most cards will do that for free;
- Some premium cards will provide a bonus, most likely extra points, for adding authorized users. Further conditions, like a spending goal, may apply;
- When you cancel your own credit card, it’s kept on your credit report for another 10 years and contributes to your average age of accounts. But when you stop being an authorized user on someone else’s account, then it’s dropped immediately. Do not get removed as an authorized user until you’ve got your own card, or else your score will drop and you might not be able to get one;
- Some banks will report date opened as the date the card was originally opened by a principal user, while others will report the date you were added as an authorized user;
- Your chances of being reported to credit bureaus are higher if you have the same last name or have ever shared an address with the principal user.
Open a joint account
Another way to share an account is to apply for a card with someone who has a higher credit score. This might be an option when you don’t have the cash to tie up in a secured credit card to build credit and you can’t get an authorized card to be reported to credit bureaus.
Your chances of getting the card will be higher, but this option comes with multiple downsides:
- First, both of you are likely to get a hard pull, dumping each of your scores 5-10 points, short-term;
- Second, both of you will be legally responsible to make payments on this card, and your co-signer might be hesitant to enter this agreement;
- Third, high utilization and late payments will show up on both your reports, so you have to convince the other party that you’ll behave;
- And last, but not least, joint accounts are almost obsolete at most major banks, so you’ll have to shop around to find one.
Diversify your credit with an installment loan
An installment loan makes a slightly smaller contribution to your score than a credit card, but is still factored into every segment of your score, especially credit mix. It won’t double your rate of growth, but it’s absolutely worth the effort. The problem with an installment loan is exactly the same as the one you had with a credit card—poor credit history will make it harder to get one. Don’t worry, we’ve got you.
Get a secured loan
Normally, it is next to impossible to get a personal loan with no or bad credit history, but there is a way around this. As with credit cards, there is such a thing as a secured loan. To get one, you’ll have to open a savings account at a bank or a credit union and deposit several hundred dollars. Once the money is in, you apply for a secured loan of the same amount, with your savings account being the collateral in case you default. Immediately pay down most of the loan and leave about $50. Keep the remainder until the end and pay it out as scheduled payments start again. Also, make a small payment now and then just to keep your account active.
That’s it—for as long as this loan is alive, it will reflect positively on your credit score.
Secured loan tips
- Find a bank that doesn’t do a hard pull when opening an account and applying for a secured loan;
- The duration of the loan should be as long as possible—some banks offer up to 60 months. Loans that are shorter than 6 months might not factor into your credit score;
- In 4-5 years, it will be easy to forget about the remaining payments and missing them will undo all the good work you’ve done so far. Make sure to set up a reminder;
- Don’t be tempted to spend the money from the loan and then pay it back as per schedule. First, you’ll pay more in interest on the remaining balance. Second, there is such a thing as loan utilization (remaining balance divided by initial loan amount), and keeping it low is as beneficial as it is for your credit card utilization.
Get a co-signer
When you can’t afford the collateral on a loan, you may ask a person with a good credit score to co-sign a loan with you. Their score will help you get the loan, but they will have legal responsibility to make payments in case you default. Not to say that this loan will appear on their credit report and influence their score. So, a certain level of trust is a must. And remember to pay down most of the loan right away—this way, both of you will benefit from low debt utilization.
Report your rent to credit bureaus
Although this is not considered to be great advice, but reporting your rent payments to the credit bureaus may help your score. The way to do it is to hire a rent reporting service; it will send the information along to one or all credit bureaus. The payments will show up as an installment loan.
The reason this is not very good advice is that, while the information is entered into your credit report, not many credit scoring models will use it to calculate your score. Therefore, it has limited value and will only be useful when you are applying for a credit card that you know for a fact will factor your rent in. It’s worth a try if there isn’t much else you can add to your report.
Rent reporting tips
- Compare service costs. Some of them might be nearly free while others are upwards of $100 per year;
- Check which credit bureaus the service reports to (and it’s best if it reports to all three);
- While rent is reported as an installment loan, it is not as predictable as having an installment loan. You might have a dispute with your landlord, miss a payment, move out, or have any number of additional arrangements. The service you select may report these items in any number of ways and may end up hurting your score. Ask about those things in advance.
Consider debt consolidation
Debt consolidation is moving all your debt, like outstanding balances from multiple credit cards, to a single location. The main reason to do so is to get a better interest rate or even exploit a promotion of a zero interest rate for an introductory period. It will not influence your credit score directly, but it will help you tackle your debt and, consequently, raise your score. However, consolidation options are only available for people with better scores, so you might have to wait a while before it you can use it.
Take out a personal loan to pay off your credit cards
This way, you are turning revolving debt into an installment loan. And it’s a great thing all around:
- First, online personal loan interest rates are normally much lower than credit card interest rates;
- Second, you free up your credit cards and your utilization goes way down;
- Third, this is another way to diversify your credit and contribute to your credit mix.
Find a balance transfer option
The other way to consolidate debt is to open a new credit card and to move all your debt there. The point is to take advantage of various balance transfer credit card offers from banks that are looking to get your business and will welcome your debt on favorable conditions. The most common offer is a 0% APR for a set period of time, usually anywhere between 6 and 18 months. Now that you don’t have to pay interest on your debt, you may redirect the funds towards paying down the principle.
Take care of what’s hurting your score
If you don’t seem to make much progress, then it’s time to take a closer look at your credit behavior and figure out what’s weighing you down.
Check your credit report for errors
About 20% of Americans have an error in their credit report, and about 5% have an error serious enough to affect their score in a significant way. To check your report for errors, request a free annual copy at annualcreditreport.com and read it through. Most common errors are open accounts that should be closed, unpaid debt that should be paid, negative items that are 7 years old but still remain on your report, and incorrect personal details. You have to dispute any errors you find.
To start the dispute process, contact either the credit bureau or the lender the error originated from. It is advised you contact the bureau first and, if necessary, it will contact the lender on your behalf. Provide a detailed description of the error and all the proof you have. The bureau will start an investigation and will notify you of the result within 45 days. If any changes are made to your credit report, you will be issued another free copy.
If the dispute didn’t go as planned, you may prepare a brief statement about the dispute and ask the bureau to add it to the disputed report item.
In the future, it might work in your favor when prospective lenders see this statement upon manual review.
Mind the reporting dates
It is possible to pay your balance in full each month and still have a high utilization rate. Why? Because your reporting cycle might not coincide with your billing cycle. In other words, the bank reports your balance to the credit bureau on a date other than your billing date. So, if you are in the habit of paying your balance right before it’s due, then you might be in trouble.
Call your bank and ask about their reporting date. Make sure that on that date, your balance is what you want it to be. Furthermore, it would be a good idea in general to pay your balance several times throughout the month and keep your utilization consistently low.
Do not close cards you are not using
Throughout your credit building journey, some of your cards may drop out of rotation and you might be tempted to cancel them. Keep in mind that when you cancel a card, the credit limit on this card will no longer factor into your utilization and it will go up right away. The right way to close an account is to offset it first with a new account or a credit limit increase on another existing account. However, if your card doesn’t have an annual fee, you are better off keeping it active.
Do not open new cards if you don’t have to
A credit card application will most likely result in a hard pull against your credit history. From that you might expect an immediate short-term drop of about 5-10 points per application. The more cards you apply to within a short time, the more points are subtracted per application (someone aggressively pursuing new credit is seen as a much higher risk). Additionally, each new card you open shortens your average age of accounts, further lowering your score.
So, if you need a new card, then it is best to apply for just one—and at a bank where you are more likely to get approved. Better yet, wait until you get a pre-qualified offer.
Play the waiting game
When you are new to credit
If you are starting from scratch, then it will take at least 6 months for your credit score to be calculated for the first time. Your initial score will land anywhere between 500 and 750 points, depending on how responsible you were with the credit instruments you’ve chosen. From then on, it will keep growing steadily as you diversify your credit, increase the limit, and age your accounts.
When you are repairing credit
There are many more variables with bad credit, and it all depends on what’s weighing you down. Missed payments, collections, hard pulls, high utilization—all those things will keep influencing your score until you either deal with them or they drop off your report. Your score won’t move much until you’ve fixed the leak, no matter how many alternative ways of building credit you employ. Beyond that, you may expect a steady growth of 50+ points per year until you’ve entered 700+ territory.
The better the credit, the slower its growth.
When you have good credit
Making good credit better is a long-term game. You might encounter sudden, short-term shifts of up to 20 points when you are pulled or when something drops off your report, but it is more likely that you will see a slow, steady growth over many years. Items that will influence you most are increased credit limits, aging accounts, and paying off your long-term loans. There’s nothing you can do to speed those up.
The bottom line
Regardless of your starting point—bad credit or no credit—your first action is to begin demonstrating responsible financial behavior. Step one is getting a credit card. Whether secured, authorized, or co-signed, that account will contribute the most to your growth. Step two is diversification. Pick one of our suggested options for an installment loan to positively influence your credit mix and debt utilization. Step three is to check what’s pulling you down. Get a copy of your report and see whether you need to move some debt around, reduce your balances, or dispute some items that shouldn’t be on your report in the first place. Check those off your list and you should be well on the way to much better credit.
Remember that your credit is a reflection of your financial behavior and your attitude towards debt. Now and then there are small tricks that will make you seem better than you are. But it’s a long-term relationship between you and the system and, ultimately, it will figure you out. While we provide you with some ways to jumpstart your credit or to give it a little push, remember that the only true way to build and maintain good credit is submit to the system and adopt responsible financial behavior as a permanent habit. It might sound dull, but it’s the best advice we can give—and you’ll be the first to benefit. Good luck!