Welcome back! If you missed the first part of this series, be sure to check it out! Here in part two, I’m going to explain to you how to start building credit when you have none.
Just starting out? Keep reading. Helping your child build their credit? Keep reading.
These simple yet specific instructions will put you on the path toward building great credit.
Whether you are seeking an FHA, VA, USDA, or Conventional loan, having a credit score is vital. Whether you have a large down payment or need a zero down loan, if you’re thinking of buying a home but you have no credit, read on!
What does it mean to not have credit? Actually, it means you have no credit score. A credit score is a numerical indicator of how likely you are to repay your debts on time. The higher the number, the more likely you are to repay money you’ve borrowed. A credit score can only be created by repaying borrowed funds, so paying rent, utilities, or cell phone bills (cell phones are technically a utility) does not create a credit score… unless you don’t pay one of these types of bills when it’s due. Then it will go to collection and create a low credit score.
Most of the time people who are college age have not created a credit score. There are many credit card companies that cater to college students, and will issue you a credit card even if you have no credit history. If you search the Internet for “student credit cards”, you will find a variety of them.
A strong word of caution here: insist on a low limit (no higher than you can afford to pay in full every month), and use the card regularly, but only for purchases you would make even if you didn’t have the card (for instance, gasoline or groceries). Pay it off in full monthly when you get the bill.
You do not need to carry a balance and pay interest on a credit card to create a credit score, you only need the credit card company to report that you pay your bills on time. You can do that without paying one penny of interest!
What if you aren’t a college student? What if you are newly divorced or widowed and never had any debt in your name, or perhaps you’ve been living outside of the country for several years? There are two sure-fire ways to build a credit score for someone in this situation.
Sure-Fire Way #1: Credit unions offer “share secured loans”.
To get one of these, you must be a member of the credit union, and you must have money on deposit with them. Every dollar you have deposited with a credit union is considered your “share” of the credit union. You can set up a loan where you are borrowing your own money (or share), so it is secured (by your own funds), which means there is no risk to the credit union. You have to pay it back over time (ideally 12 months) in order to effectively create a payment history. This will incur a small amount of interest, but you can’t be turned down for this type of loan and once you’ve completed the repayment it will be easier for you to get other types of credit.
Sure-Fire Way #2: Credit card companies offer secured credit cards, which operate under the same principle.
You deposit funds with the credit card company, and when you use your credit card it is secured by the money you have on deposit. Once you’ve established a history of on-time payments (typically after 12 months of regular usage), you can get your deposit back and it will be easier for you to get other types of credit (including a home loan). If you search the Internet for “secured credit cards” you will find a variety of them. Again, I would offer a strong word of caution here: use the card regularly, but only for purchases you would make even if you didn’t have the card (for instance, gasoline or groceries). Pay it off in full monthly when you get the bill.
You do not need to carry a balance and pay interest on a credit card to create a credit score, you only need the credit card company to report that you pay your bills on time. You can do that without paying one penny of interest!
Next week we’ll discuss how to really understand if you have good or bad credit. You won’t want to miss it!
But First, Get Pre-Approved 
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