One of the conundrums of life is that it often takes credit to get credit. In simple terms, if you want to get a credit card, it helps if you already have one.
But what if you don’t have any credit? What if you were “invisible to the credit bureaus,” as Carlos Sada, the Mexican Consul General in Chicago, puts it.
For millions of Hispanics, other immigrants, and even college-age students, the problem isn’t having too much credit, but having any at all. When you pay for everything in cash, stash your dollars in your mattress, and don’t even have a savings account, it’s tough to account for your finances in conventional terms.
But if you want to buy a house, you have to develop a credit history and that means opening up bank accounts, credit card accounts, and learning how to work the system to your own ends.
Here are some simple steps anyone can take to help establish their credit history.
Open up a checking and a savings account.
Unbelievable as it may seem, a large percentage of Americans don’t have checking or savings accounts. According to City of Chicago Treasurer Judy Rice, a full third of City employees don’t have bank accounts. “We can’t pay them by direct deposit because there’s no account to put the cash into,” she laments. The situation is the same all over the country. If you want to establish credit, an important step is to become part of the conventional banking world, and that means opening up a checking account and a savings account. Once you get them open, ask your banker about online banking and electronic bill pay. Then, you can ask your employer about electronically depositing your check right into your account.
Ask your bank for a secured credit card.
Once your accounts are opened, you should ask your bank if you can get a secured credit card. A secured credit card means you deposit a sum into a separate account, and are issued a credit card by your bank. You can charge up to the amount that’s in the account on your card, and the amount you charge is automatically deducted from your account. But unlike a debit card, a secured credit card demonstrates your ability to manage credit wisely, and will ultimately help you establish good credit.
Apply for a major credit card.
Once you’ve had your secured credit card for 6 to10 months, you can apply for a major credit card. Don’t apply for more than one, however, until you’re sure that you’ll be approved. To find a good credit card deal, check out CardWeb.com or BankRate.com.
Use your credit card a little. But don’t run a balance.
It’s not enough to have the credit card, you also have to use it from time to time. A $25 or $50 charge once or twice a month, paid off entirely at the end of the month, is enough to show that you know how to manage your credit wisely. One of the big misconceptions consumers have is thinking they need to run up a balance on their credit cards in order to prove they can handle their credit. Not true. All you need to do is pay the bill on time. It’s better for your debt-to-income ratio (a standard by which lenders compare how much you owe to how much you earn) if you have a zero balance.
Pay all your bills on time.
It bears repeating again. If you want to have great credit now and in the future, always pay your bills on time. Even if you can’t pay off your credit card bill entirely at the end of the month, you have to make at least the minimum monthly payment by the due date. It only takes one or two late payments to tank your credit score. And then you’ll need at least a year or two of on-time payments to make your score go up again. It’s not worth it. Better to pay all of your bills on time each month so that you maintain a high credit score.
Non-traditional credit counts as well.
If you want to buy a home, but don’t have the traditional forms of credit (bank accounts, credit cards, loans, etc.), you can still prove you’re credit-worthy by using non-traditional forms of credit. These would include showing that you pay your rent and utility bills on time each month. Your landlord can swear in an affidavit that you pay on time each month, and a mortgage lender will accept that as proof that you do know how to manage your money.
Check your credit history at myFICO.com
It’s important to check your credit history and score periodically. New legislation will require credit reporting bureaus to give you one free report each year, but for $12.95, you can go to myFICO.com and get not only a copy of your credit history (the version that Equifax has and distributes) but your FICO score, which is more commonly known as your credit score. It’s important to regularly check your credit because mistakes and errors happen. Also, your identity could be stolen and new forms of credit opened up in your name without you knowing it. By periodically checking your credit history and score, you can see what lenders see, and make corrections or improve your money habits in order to make your score rise. Every time you pull a copy of your credit history at myFICO.com, you get a series of specific suggestions on what you could do to raise your score. This isn’t generic advice, but advice that takes into account what’s wrong with your score, as opposed to your spouse or partner’s score. So it’s wise to follow the recommendations.
When you finally apply for a loan, avoid predatory lenders.
You don’t want to develop a solid credit history and then get sucked into getting a mortgage with a predatory lender. That could leave you in a far worse position than simply having no credit. Predatory lenders look like other mortgage lenders, except they tell your credit stinks so you have to pay thousands of dollars in extra points and fees on your mortgage (which you’re darned lucky to get at all, they’ll tell you), and the interest rate might be 5 to 10 percentage points higher than what other lenders are quoting.
But if you’ve followed the suggestions on this list, you’ll have built a top-quality credit history, you’ll have seen what the credit reporting bureaus have recorded, and you’ll know your credit score. Knowing those facts should make you invulnerable to a predatory lender.
Remember, with a credit score of at least 680 or higher, you’re a top-quality borrower that any mortgage lender would be happy to have. And by shopping around for your rate ahead of time (BankRate.com is a good place to do this), you’ll know where interest rates and points really are in the competitive marketplace.