To Build Your Credit, You Have Options

Thursday, December 29, 2011, 2:00 AM | Leave Comment

A nephew of mine is visiting from the old country. He just got his Green Card. He applied for a credit card at his bank but was denied. One of the credit report companies sent him a letter that he had no credit history. He must first build his credit history and then apply for a credit card.

Now on the surface, it’s a catch-22 scenario. So I did some research for him and found out you slowly but surely can create and build your credit history to your advantage. It takes time but you can do it if you live your financial life more carefully.

So if you are like my nephew or just came out of bankruptcy and your credit history is all screwed up, there are ways to build your credit history.

Secured credit cards

To open a secured credit card, issuers require a deposit – generally of $200 or more – that will equal the amount of your credit limit. Some banks pay interest on the deposit.

These cards can be expensive. The more common features include: Annual fees, set-up and application fees, no grace period. You pay some amount of interest regardless of whether you pay your balance in full each month.

Since these cards have no credit requirements, it’s important to shop around for the product with the best terms.

Prepaid cards

Prepaid cards are a hybrid of debit and secured credit cards. You deposit a certain amount of cash that you can spend. The benefit of doing this is to protect your bank account from schmucks and scums. Some prepaid cards also claim to help you build a credit file. So you have to do more research and find those prepaid cards.

The prepaid cards that offer building credit history don’t report to the three credit bureaus – Experian, Equifax and TransUnion – that all big lenders use. Instead, activity is reported to a bureau called PRBC (Payment Reporting Builds Credit). PRBC calculates a FICO Expansion score, an alternative credit score used by some lenders for customers who don’t have enough of a credit history to calculate a regular credit score

Debit cards

My nephew thought a debit card from his bank would help him build credit history. But a debit card linked to your bank account offers the convenience of using plastic. It does not help you build a credit history.

Check your credit score

Credit score is very important and will get better if you repay your loan on time. It affects whether you will get loans, mortgages, or credit cards. There are some ways to protect your financial credit score.

  • Don’t cross your credit card limits.
  • Mortgage loan is having a major impact on the credit score. If you have such loans – and who doesn’t – always pay it on time.
  • Try to reduce your debt – and eventually eliminate it – as soon as possible.
  • Bankruptcy will greatly affect your credit score.

So always check your credit statement and try to make your credit score better.

In a Nutshell
If you are just starting out, like my nephew, or coming out of bankruptcy, there are ways to start building your credit history. It takes years, probably more than 7 years, to establish a good solid credit history. You just have to change your financial lifestyle and your mindset once you start going on the journey of building your credit history. And we all know that a thousand-mile journey starts with your first step.

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