Building Credit From Scratch

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No matter who you are, everyone begins life with a low credit score. This post will show you how to grow your credit score over time, so one day you can have a credit card of your own, purchase a car and fulfill the American dream of owning a home. I will explain how to improve your chances of being approved for a credit card and for those of us with little or no credit, show you how to build credit from the bottom up.

Secured Credit Card

A secured credit card is not a debit or prepaid card. A secured credit card is an option for people with little or no credit, providing them with an opportunity to build credit as they make everyday purchases. A "secured" credit card is backed by a cash deposit, typically ranging from $200 - $5,000, which also acts as the credit limit. Over several months your credit score will begin to improve if you pay your bill on time, and have a low utilization score. Napkin Note: Credit Utilization is an indicator showing lenders how much credit you are using in relation to your credit limit. For example, if you have a $5,000 credit limit of which you use $2,500, your credit utilization score is 50%. To grow your credit score, you will need to keep this number at or below 30%.

A secured credit card is only stepping stone and when your credit score improves to at least 600, you can open an unsecured credit card and close your secured card. I would recommend doing so in that order as you still may be declined for an unsecured card. Once your secured card is closed the lender will give you back your original deposit, plus any interest it may have earned.

Who Offers Secured Credit Cards

Capital One Bank Platinum Visa

Capital One Secured Mastercard

Citi Secured Mastercard

Discover It Secured

Now let’s Build Your Credit from Scratch

Credit-Builder Loan

A credit-builder loan has one purpose; to build your credit. Here’s how it works:

●        Sign-up for a loan from a community bank, credit union or an online lender.

●        The lender holds the money until to loan is fully paid off.

●        You begin paying monthly payments as if you received a loan.

●        The lender reports your completed payments to the three credit bureaus, and your credit score begins to grow.

●        Once the loan is fully repaid, the money you borrowed is released to you. The lender keeps the interest.

I highly recommend a credit-builder. In addition to building your credit, it acts as a forced savings account since you will receive the money back once the loan is paid off. Of course, the lender does not work for free and will keep the interest, but typically the interest amount is small. For example, if you borrow $1,500 over 24 months bearing a 10% interest rate, you will pay approximately $160 in interest.

Co-Signer

If you have a close family member or spouse with strong credit, you can apply for a “normal” unsecured credit card, and you will have a higher chance of being approved. Make sure you and your co-signer understand, that if you fail to make a monthly payment, the co-signer will be on the hook.

Become an Authorized User

Becoming an authorized user is also an excellent option for building your own credit.  When you become an authorized user, you are being added to someone else’s credit card account. Again if you have a close family member or spouse, they can make you an authorized user, and you won't be obligated to pay the credit card company.

The difference between a co-signer and an authorized user is an authorized user is not responsible for the monthly payments, and if the primary cardholder on the account fails to pay his/her credit card bill, on their credit score will be hurt.

So there you have it, follow these steps, and you will improve your credit score over time, please leave comments below if you have questions.