Establishing or Rebuilding Credit Tips
There are multiple reasons why people may want to establish new credit. They may be new entrants into the world of credit, or are perhaps trying to reestablish credit after a financial hiccup. Either way, there are some do's and don'ts that consumers should follow that will make the road to credit much smoother.
The National Foundation for Credit Counseling (NFCC) suggests that consumers consider the following tips when applying for credit:
- Do obtain a copy of your credit report from www.annualcreditreport.com.
This is particularly useful if you are trying to rebuild your credit, as you'll want to review what existing debts you need to satisfy before moving forward.
- Do open checking and savings accounts.
Even though this activity is usually not reported to the credit bureaus, lenders may inquire about the presence of such accounts on credit applications, thus it can count in your favor.
- Don't apply for too much credit at once.
This can appear as though you're desperate for credit and perhaps make lenders less inclined to extend credit to you. Further, too many credit inquiries can have a negative impact on your credit score.
- Do apply for a variety of credit types.
Credit scoring models value having different types of credit. Therefore, having some revolving accounts (typically credit cards) and some installment fixed payment loans (such as a car payment) can improve your score.
- Do research the type of card that is right for you.
Each issuer has different lending standards (yes, credit card is a loan), so you'll only want to apply for cards from those whose lending profile you fit.
- Don't fall for a credit repair scheme.
Why pay for something that you can do for yourself for free? If rebuilding credit, know that time is your friend, as the farther you move away from the financial distress, the less negative impact it has. Follow with responsible behavior with your new credit, and you'll soon have a solid credit file.
- Do consider a co-signer.
Obtaining a loan in the absence of any credit history can be difficult, sometimes requiring a co-signer to guarantee payment. The loan is usually structured where the primary borrower is expected to make the payment, with the pay history reported in both names. If the borrower defaults, the lender will approach the co-signer, and missed payments will be reflected on both credit files. There is somewhat of a risk to the co-signer, but if handled responsibly, co-signing can be an effective way to help another person obtain and build credit.
- Do consider a secured credit card.
This type of account is secured by a deposit made to the financial institution issuing the card. For example, if you wanted a card with a $500 limit, you would deposit that amount with the bank offering you the card. Know, however that secured cards can have fees attached to them, and typically have a higher interest rate. The account activity is reported to the credit bureaus each month, and after responsibly making payments on a secured card, the issuer often offers the borrower an unsecured card.
- Do take out a small loan.
A personal loan from a bank or credit union can serve to establish credit. You may be asked to put up collateral, but it will be worth it in order to build your credit.
Whether just starting out or rebuilding credit, if you need financial advice, consider reaching out to an NFCC Member Agency. To find the one closest to you, call toll free to (800) 388-2227, or go online to www.debtadvice.org. For Spanish, call (800) 682-9832.