Bad credit stands out like a Scarlet Letter super-glued to your forehead. If you have bad credit or none at all you can’t easily get a car, an apartment, a house loan, or even sign up for many basic utilities without a deposit. It’s okay though, because unlike changing the minds of Puritans, building and even fixing credit can be much easier than it seems.
One of the big myths about credit is that you need to be rich to have good credit. As someone in their 20’s with no great fortune, I can assure you that notion is poppycock. You can build credit even if you are only making even a few hundred dollars a month if you manage your finances well.
The first step to establishing credit is to open a bank account. I have met plenty of people who prefer to hold cash they earn or cash their checks for a fee rather than put their money in a bank account. It is not a good idea to hold onto all your money as cash. I’m not saying your pet will decide to rip your money into confetti or that you’ll be robbed, but it could happen if you leave it lying around and nobody will replace your torn up bills.
I have had bank accounts with a few major banks and a couple different credit unions. Locally owned credit unions should be your first choice. They care more about their customers which is reflected in their services by offering better interest rates and lower deposit requirements than larger institutions. Credit unions also reinvest into the communities they serve through providing jobs to your neighbors and sponsoring local community programs and events. If you’re nice when you call customer service, they might even reverse some overdraft fees. I’ve had quite a bit of luck with fee reversals at credit unions over the years, but never with large national banks.
If you open an account with a large national bank make sure you do your homework to find the bank with the lowest fees, deposit requirements, etc. Most accounts require you to hold a minimum dollar amount to avoid being charged a monthly service fee. The service fee can be a ridiculous amount if you hold a small amount of money in the account. For example, Bank of America had a $12 monthly service fee to hold less than $500 in an account, but would waive the fee if I had direct deposit. Since I didn’t have direct deposit available from my employer and didn’t hold over $500 in the account I promptly closed that account. Considering they are holding onto your money and investing it to make a profit on top of charging you to keep your money there, the major national banks are a bit unscrupulous.
Once you have set up your account, you should look into setting up a low-limit credit card through your credit union or bank. If you can’t get a credit card through your banking institution, there are plenty of other options to choose from and Samuel L. Jackson and Morgan Freeman can tell you so themselves if you watch TV long enough.
For those with low or no credit, I would suggest getting a credit card through a store you enjoy shopping at. Stores that have credit cards often have promotional offers and will sometimes offer you a one-time discount off your entire purchase to sign up. These stores tend to have more lax rules regarding credit approval. I won’t argue that easy credit a good thing, but if you’re aiming to build credit it can be a great option for you to start building credit.
They will run your credit initially to approve or deny you for the card. The most important factor however is usually income. Don’t apply for a $500 limit credit card if you only make $600 a month. Aim for somewhere around 15-20% of your monthly income. The higher the card limit you apply for, the higher the chance you have to be declined. It is not the end of the world if you are declined, but it can look bad to other creditors if you then apply for another card at another institution immediately after.
The key to using credit cards to build credit is to be responsible with them. Always pay on time; do not keep your card near the maximum limit; be mindful of how much interest you pay on your credit purchases. If you don’t pay your balances off or only make the minimum payments the interest will add up quickly. Credit companies will also pile on fees if you are late though, and can lower your credit limit or cancel cards if you fail to pay in a timely manner consistently.
The periods of time where my credit has been the best have been the periods where I had all of my credit cards paid off and held a zero balance on them. Within the course of a month, I have seen my credit increase over 100 points simply due to paying off my credit cards.
Beyond opening a bank account and maintaining credit lines, one last thing that helped me build my credit has been my car. I understand it is not feasible for everyone to buy or lease their own car, but car loans are an incredible way to build your credit.
My first car was a lease through Subaru. They were running a promotional offer on a 2014 Impreza and with tax my payment was only $184 each month. I was approved to lease the car without credit or a co-signer and only proof of income to show the dealership. When I wanted to upgrade to a Legacy a year and a half later I did not have good credit, but since I had faithfully made all my lease payments on time they approved me for a new Legacy based on payment history and proof of income.
I could write a whole blog post on how to choose which car to get or whether to lease or buy, but that’s going to have to wait for another day. With the information I have given you though, you have most of the information I struggled to learn first-hand in the last couple years. I am missing plenty of other good advice so don’t take my advice as the end-all be-all answer on how to build or fix credit, but use this information to build a foundation for your financial future if you haven’t already begun to do so.