Do This, Not That: When Building Your Credit
There are so many credit products available to consumers – from traditional financial services like credit cards and personal loans, to “alternative financial services” like prepaid cards and auto title loans. And knowing how these products work and what to avoid (like triple-digit interest rates and fees) can help you make smart credit choices and save you money!
Use secured credit cards to build or rebuild your credit. These cards look and act like a regular credit card but require an upfront cash deposit that will be held in a savings account or Certificate. Your credit limit is determined by how much you deposit in the account. You can then borrow against the limit and are required to make monthly payments by the due date. Your activity is reported to the credit bureaus, helping you to establish a credit history for future borrowing.
Close out old credit cards – the more credit you have available, the lower your credit utilization will be. (And the longer average credit history!)
Set up automatic payments or use online bill pay to prevent any late payments, which could lower your credit score.
Keep your credit balances low. Experts recommend using less than 30 percent of available credit to help improve your credit score.
Use prepaid cards if you don’t have to. These look like a regular credit or debit card but they are not reported to the credit bureaus, do not build your credit and most often do not pay you any kind of interest for keeping a balance on the card. These cards are paid for (loaded) upfront and typically have added costs like activation fees, reload fees and ATM withdrawal fees.
Take out an auto-title loan. Auto-title loans are a quick way to get money without a credit check, and offer your car up as collateral against the money borrowed. Because of the shockingly high interest rates (the average is 300% APR), many consumers spend thousands of dollars trying to pay back the loan over several years. And if you fail to pay back the loan, you risk losing your car to the title loan company.
Make your payments on time. When you pay your bills on or before the due date, lenders, credit card issuers and even utility companies report the on-time payments. This has a positive impact on your credit score.
Use store credit cards regularly. Generally, a credit card from a retail store is easier to qualify for than a major credit card – and will a have lower credit limit and higher interest rate. While a store credit card might be useful in establishing a credit history, they are often viewed as inferior credit products. If you do use a store credit card, make sure you pay it off every month.
Make sure you can afford the payments first. Getting in over your head in debt is easy. There usually is a difference between what you qualify for and how much you can really afford to pay. Take a look at your income and expenses to figure out what loan payment you can make without having to eat ramen noodles at every meal in order to survive!