Building and keeping a good credit score is a function of responsible use of credit cards and other loans. It’s simple – pay on time and keep your debt low and your score will come up.
But what about if you don’t have an established positive credit score, and you’re starting from scratch? Usually that happens either when teenagers come of age and are ready for college or the working world, or for consumers who’ve had to file bankruptcy. There are a lot of subtle nuances to bolstering a credit score when those are your starting lines.
How do young people and college students build a credit score?
Children don’t start out with a score of zero, but usually begin with about a 600 credit score and then need to add positive factors to build it from there.
The most efficient way to build credit is through a practice called “piggybacking,” where a parent adds their child on their credit card as an authorized user. The child doesn’t even need to use the card, but as their parent’s use it responsibly they will receive the benefit to their credit score. Piggybacking is legitimate and recognized by FICO, as long as it’s a family member added as an authorized user.
But what about college student getting credit on their own? Not so long ago they were barraged by offers for credit cards, along with enticements of free pizza and free t-shirts, and that led to a lot of bad credit card decisions. But since the CARD Act of 2010, credit card companies as to how they can advertise. SO most likely, the college student will have to go looking for credit, not the other way around.
The best way to establish credit is by starting small – using stepping stones so to build a good score without getting overwhelmed or mismanaging their debt.
A secured credit card is a great place to start. A secured credit card means that the cardholder will have to make a deposit ahead of time for the amount of the credit line on the card. So someone can send in $300 and get a credit card with a $300 limit. That may sound ridiculous, but it actually encourages responsible use without any risk to the creditor. Therefore they are easier to get for young people with no established credit score and maybe no proof of income.
At some point it also might be good to add a retail card, like a gas card or from a store, and possibly an installment loan. They may be easier to get approved, and will balance out the type of credit accounts on their report.
Once the secured credit card and/or retail card is in place and used correctly, the college student will receive other offers in the mail. It’s important not to apply to too many cards at once, and pick and chose the right card with low interest rates and low fees.
Once they get a standard credit card they should pay their bills on time, keep their balances low, and use it responsibly to increase their score.
How about people who have to file for bankruptcy?
Bankruptcy is legal amnesty from paying your debts, usually based on a financial hardship. The number of people who file bankruptcy has exploded in the last few years due to the real estate crash and subsequent recession. It’s common knowledge that a chapter 7 bankruptcy will essentially wipe out your debts but the downside is that it severely impacts a consumer’s credit score. But most people don’t realize that you can keep some loans in good standing after a bankruptcy, especially mortgage loans and auto loans.
One of the best way to rebuild your credit score after a bankruptcy is to keep certain loans in good standing through the bankruptcy, reinstating them or excluding them and continuing to pay the debt on time every month.
Coming out of a bankruptcy, it’s important to monitor your credit score frequently to make sure the rebuilding process works in a timely fashion. The bankruptcy should be discharged about 30 days after it becomes official (meaning your debts have been discharged). If you don’t see the discharge on your credit report within 60 days, file a claim with the credit bureaus.
It’s recommended to start from scratch with a secured credit card, just like a college student, to get a positive new trade line that you can use as a stepping-stone. Just make sure that the secured card reports to all three of the credit bureaus.
After about 6-9 months you’ll probably start receiving offers in the mail for new credit cards. Choose wisely and don’t jump at all of them – you shouldn’t apply for or accept more than 2-3 cards within the next 6 months.
When you get your new credit cards, make sure you don’t over use them – keep your debt low, below about 30% of your total available credit, and no matter what make sure you pay on time every month. It’s recommended to pay more than the minimum payment every month.
Keep monitoring your credit score regularly because the inquiries should fall off after 2 years, and then other debts and collections after 7 years, while the bankruptcy will fall off the report after 10 years. But with these pointers, you’ll have established new credit and increased your score from scratch within the first couple of years.
Comments (0)Subscribe to CommentsComment