Do your credit reports have more trash in them than Madison Square Garden after a Stones concert? Or maybe they're just a little barren and need a jump-start? If you’re having trouble figuring out how to get your credit on the right track, you are not alone. The most common question I’ve heard since I became a Financial Counselor is, “How do I build good credit?”
The good news: no matter how much wreckage you’ve crammed into your reports, you can always make improvements. Here are two great ways to rebuild your credit - with some musical illustrations to inspire you.
Option 1
Become an Authorized User
Not exaggerating, this is one of the few great financial shortcuts out there. I can attest to it’s efficacy from first-hand experience.
When I became a Credit Counselor my FICO scores were hovering around 600 (not so good). I was highly opposed to using credit cards and was afraid that I would have to get one in order to start building my credit. Then I learned about the authorized user option. It was solely through becoming an authorized user that I saw my scores improve by about 80 points in a year (each person's results may vary - please contact me if you have questions).
Mom, call your credit card company and get my name up on that account!
How It Works
All credit card accounts have at least one Primary Account Holder (PAH). That’s the person who applied for the card, had their credit checked, and is now fully liable for any debt accrued. The PAH can very easily add another person’s name *yours* to that same account as an authorized user. It’s as simple as making a call to the credit card company.
Since you will not be liable for repaying the charges on the card, your credit will not be checked. Furthermore, you won’t actually need access to the credit card account, nor will you need a copy of the credit card - this is a good selling point when you are wooing your prospective PAH. Once you become an authorized user, the info for the credit card account will begin to appear on your credit reports, just the same as it does for the PAH.
Girl, would you still love me if II asked you to add me as an authorized user?
A Word to the Wise
Make sure you choose a PAH who is extremely responsible, especially when it comes to credit (think of someone who would never let you down). If your PAH misses a payment on their card, both their credit scores and yours will take a major hit. If your PAH runs up the balance on their credit card, both their scores and yours will drop. So consider making like 50 Cent and asking your potential PAH 21 questions *okay maybe just 2 or 3* about their credit habits before letting them become your Fairy Credit Mother.
Nobody ever told her the right way to get a secured credit card.
Option 2
Open a Secured Credit Card
Can't get approved for a regular credit card? A secured credit card is an option that most people, even those with sewage-laden credit reports, can qualify for.
Secured credit cards are easier to obtain because instead of qualifying by having good credit, you qualify by making a deposit. In other words, the credit you are extended is being “secured” by your deposit. The limit on the card (or the maximum amount you can charge) will be equal to the amount of money you fork over. Aside from that detail, secured credit cards function just like regular credit cards.
Some of you have already applied for secured credit cards and have had negative experiences. That’s because, unfortunately, there is a right way and a wrong way to do this. For starters, you’ll want to find a reputable credit union or community bank in your area (use this helpful tool). Unlike a big bank or an online bank, they’re more likely to offer quality products that are actually meant to help their customers.
Hey credit union rep, let's have a little chat.
Ask These Questions First
If you want your Secured Credit Card to have the maximum impact on your credit, it must possess a few very particular qualities. Talk to a representative at your chosen banking institution and make sure they say “yes” to these two questions before you apply:
1. Will you report my account info to all three major credit bureaus?
You want to be sure that the information from this new account will positively impact all three of your credit reports and scores.
2. Does the secured credit card have a “conversion option?”
Some secured cards automatically close after a set period of time. Not cool! You’ll want the card to eventually “convert”, or change, from a secured credit card to a regular credit card. The goal is to continue using it indefinitely, rather than having to open a new account. Why? Because keeping your credit accounts open for as long as possible will help your credit scores. By contrast, opening and closing accounts actually hurts your scores.
Take that secured credit card to the highest limit girl!
One Last *Musical* Note
Contrary to popular belief, one of the best things you can do for your credit scores is to maintain credit cards with very high limits and very low balances. In nerdspeak we call this having a low "debt-to-credit ratio", or a low "credit utilization ratio" (you can learn more from FICO - just ignore all the ads). Keeping your balances low is a way to show your future creditors that you are not financially dependent on your credit cards.
So if you're applying for a secured credit card, you'll want to get the card with the highest limit you can qualify for (without going broke when you make the deposit).
ProTip: If you get a secured credit card with a $1,000 limit, try to never carry a balance of more than $100 on the card at any given point in time. I suggest setting up the card to automatically pay one of your small monthly expenses (Netflix?) and not using it for anything else.
I love these credit 1, 2 steps.
Not sure if either of these 2 steps is the right option for you? I’m happy to offer a free 15 minute consultation to help steer you in the right direction.
Got questions or feedback? Please share your thoughts in the comment section below!