No credit can sometimes be just as damaging to you as “no-good” credit.
It sounds crazy, and many who have always responsibly paid cash for everything become more than a little angry when told they can’t get a mortgage loan because they have no credit. At least folks who have had bad credit know the reason why they’re having trouble.
The fact is, if you have no credit, lenders have no way to determine if you’re a responsible bill-payer. You have no reputation – no history to offer to show that you do indeed pay your accounts on time. That makes them nervous.
If you find yourself in the position of needing to either build or re-build credit, you’ve probably been told that you must first establish a record of paying debts on time – by getting a line of credit somewhere.
Where? Who is going to give you that line of credit? A company that offers a secured line of credit, that’s who.
In this instance, you offer some kind of collateral or deposit for the amount of credit desired. This gives the lender security in case of default. It could be a deposit into a savings account, a certificate of deposit, or a money market account.
Secured credit cards are a very effective way to build or re-build credit, but there are two things you must consider.
First, use the line of credit, but pay it off on time each month. Don’t use it to go further in debt. The goal here is to show a history of responsible money management. It might be tempting when money is tight to just let the lender take your security – but that will only serve to damage your credit score.
Second, look before you leap. Different lenders have different policies, so investigate each one you’re considering. Read the fine print and ask questions. Make sure you understand the interest rate that will be charged if you don’t pay the balance in full each month. Learn their grace periods, their penalties for late payments, and any other fees that may be associated with your account.
After 6 months to a year of responsible use, many lenders will increase your limit, which will further improve your credit score. When you continue to pay off the balance each month your credit repot will show that you have more credit available than you are using, and you will be seen as a responsible money manager.
