Principles to follow for financial independance
Are you someone with 0 credit history embarking to be self-reliant individual in society? Are you someone with a poor credit score? Maybe you just started college or moved from another country. You might be running into issues getting a simple lease/utility connection setup or signing up for a cellphone plan. All because you do not have any credit history. Some of us have been in such situations and in this article, I am going to discuss ways to build credit history and improve your credit score.
What is Credit History ?
Credit history is a record of your debt repayments to various financial/non-financial institutions. It shows how many lines of credit you have open at any time. How much of your credit lines are you utilizing? Any bankruptcies or not in the past. If you made repayments on time in the past or not.
In the US, there are 3 big credit reporting bureaus TransUnion, Equifax and Experian. They collect above mentioned data on you from thousands of sources like your credit card provider, bank, utility, rent company etc. They then try to form an overall financial picture of you.
What is Credit Score?
A company called FICO then looks at these reports & provides a credit score for any 3rd party. These 3rd parties might want to judge your ability to borrow and pay back money. They have their own propriety algorithm that helps give out scores based on credit history. They give some basic factors on their website. Similar to FICO scores, there is Vantage Score by the above mentioned 3 bureaus. Basic concept is the same, to judge a borrowers credit worthiness. Now that we know credit history definition and credit score, let’s look at its importance.
Why is credit history important?
- It allows any financial institution you approach to borrow money to look at your credit worthiness. They can see how much money you already owe to other companies. Decide on whether to lend you money or not. This could be a new mortgage, auto loan, personal loan etc. Each place will look at your credit history to decide on the interest rate for the loan.
- Many non-financial institutions such as apartment complexes, Telecom & utility companies also look at your credit history. They are trying to judge if you are managing your finances properly or not. If not, then they might decide to charge some extra refundable deposit before moving in to an apartment or to sign up for a new utility connection etc.
- Even credit card companies look at your credit history before letting you open a new card with them. If they see you have not been a good borrower, to cover their risk, they might charge a higher interest rate on unpaid balances on your card.
Ways to build credit history & credit score
Now obviously if you are someone starting young or just moved to the US from another country, your credit history and credit score is going to be 0/negligible. So, you might have a hard time getting anything done. You might have to put down unnecessary deposits and lock up the money at many places of business for no good reason. So here are 7 ways you can build credit history.
1. Sign up for secured credit cards
Most non-secured credit cards at low end need about 6 months of credit history to approve an application. To circumvent this, you can apply for a secured credit card just to build credit history. In such a card, you can deposit let’s say 1000$ to the credit card company. They keep it as collateral and give you a credit card which you can use for the same limit. As you make payments on it every month, your credit history builds up. Later you have the option to convert that card to a non-secured card with the provider or close it outright and get new ones. Obviously, this method comes with the drawback of locking in your money with the company as collateral. So, do this only if you have the money to spare. My favorite one is Discover It Secured (no affiliation or referral).
2. Add yourself as an authorized user to somebody’s credit card
Credit card companies like Discover, Amex and Chase etc. report authorized users on their cards to credit bureaus. Sometimes they even report the primary users old payments on your credit history. So, this helps in building credit history quickly. You can ask your close personal friends, relatives, parents to add you as an authorized user on one or two of their credit cards. Another thing is you do not need to necessarily use the card. You can just be an authorized user and let the company report your name as one of the people involved. That is enough to build credit history. So, do make sure the person you request themselves have good credit score. However, remember to make sure to pay in full any amount if you use it to whoever added you as an authorized user. This impacts them as well as you, if you miss any payments. So be responsible for your and other person’s sake.
3. Retail store credit cards
Retail stores like Walmart, Target, Gap offer their own open loop credit cards. Stores have incentive to approve people with lower credit history. Since, once you get a card approved, you are more likely to shop there. Plus, they help retailers boost their financials with more interest income. Disadvantage is that interest rate is usually very high. So make sure you pay off these cards in full. These cards usually come with low credit limits. You do need some minimal credit-history to show up in the stores application verification. Also, make sure you get a open loop credit card with a VISA or MasterCard logo on it.
4. Unsecured Credit Cards for Immigrants, Students Or low credit history
Staying in line with credit cards, a very young person or an immigrant might have 0 credit scores or history. In such cases, try the Petal Visa Card, Journey Capital One Card, Deserve Classic card. These cards usually approve people with little or no credit history and report your activity to credit bureaus. This, in turn helps to build credit history.
5. Look for small loans from your place of education
This happened to me. I needed about a 1000$ loan from the university and I had 0 credit history. The loan was for some ceremony at the university and so they had a department that would offer 0% interest loans for this. Since the money would eventually go back to the college and I was paying my tuition fees, they were open to lending me money. And guess what it even showed up as the very first loan on my credit history and helped me to a good credit score once I paid it off. So, if you are a student who just started college, do look out for such opportunities at your university. Of course, don’t just take on loans for the sake of building credit history. Take them only if you need them.
6. Co-sign a loan
Cosigning a loan is big step for you and your cosigner. The other person is liable for any unpaid amount on the loan. But cosigning with a person who has good credit score helps you get approved for the loan. At the same time once you start making payments towards it, it builds your history.
7. Build credit history using bills you already pay!
Assuming you are renting and paying your rent every month, usually there is a payment processor for each apartment like RentTrack, Paylease etc. You pay the rent to them and they pass it on to your apartment complex. But they also have ability to report this rent payment to credit bureaus. Do inquire about this and sign up for this feature. Once you do, they will start reporting your payments and help you build credit history. This is a pretty hidden method but it works great for me! Vantage Score which is increasingly being used by many lenders already reports utility and rent payments. Similarly, FICO scores version 9 will start taking rent payments into account.
Additionally, there is a service called Experian boost. If you sign up for it, you can yourself report your cellphone plan, rent and utility payments to Experian. This only works with Experian, but at least you get to build some history with them. Any financial institution that looks at Experian will be able to see these payments under your record. They also claim this eventually boosts your credit score.
How to maintain a good Credit history
So far, we only discussed ways you can start building credit history from 0 or improve it. But, how to maintain it and make sure you get good credit score?
1. Pay in full and on time
Any kind of credit card payment, mortgage/loan payment needs to be paid in time and in full. This is the highest factor to get a good credit history and credit score. This shows you can be reliable to lend money to.
2. Have a low credit card utilization
Once you have a credit card on your own name, it comes with credit limit. Try to stay below 15-20% of it every month. Having a low utilization signals you don’t need much credit. It shows you are not living your life only on borrowed money. This helps with opening new lines of credit in future.
3. Keep credit cards open
The average age of all your credit card accounts is a small factor for your credit worthiness. So try to keep your first few credit cards open. They help in showing a good length of credit history and increases credit score.
4. Do not apply for credit cards or credit too frequently
If you apply for 2-3 credit cards in span of 2-3 months. The credit card company might think something is wrong if the person is needing so much credit. They might reject your application, and this might show up on your credit history as a negative point. So make sure you do not open new lines of credit frequently.
5. Track your credit history and credit score using free resources
Websites like Credit karma, Experian Boost provide you ways to check your credit score. This way you can see if you are doing a good job or not. Chase and Discover even show you your estimated credit score using various sources for free if you have an account with them, I find these sources incredibly useful to track my credit history and also to make sure there is not some mistake on it. If there is, you can try to request credit bureau to fix it.
You also have the option to get your credit report from each of the 3 bureaus once a year for free. It should be sufficient to check up on any inconsistencies etc. In case you get rejected for a new loan or credit card application, you also have the right to request for the credit report from the institution that rejected you within 60 days of your request.
I understand and have personally been in situation when I was young with a zero credit history. I know it can be incredibly hard to even sign up for basic utility services without a good credit score. It took me a few weeks to a couple of months for most of the methods mentioned above to start showing up on my credit history. In a few months I had a good score and was able to navigate any request from any institutions successfully.
Do understand that all companies involved in financial ecosystem benefit from you having a good credit history. It allows them to lend you money and make money on the interest. So it is in their best interest for you to have a good credit history and a good credit score. Then they can lend you money. Companies do understand that young people or people new to US might have 0 credit history. Now they are requesting credit bureaus to look at other payment data like rent payments etc to judge the credit worthiness of individuals. It might take a few weeks to months but you can improve or build a good credit history using above mentioned methods.
Please let me know how any of these methods worked for you in the comments below. If you have any methods, I might have missed to build credit history, please mention them too. That would help the community grow as well.
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