Credit Rebuilding : How to Add Positive Credit to Your Credit Report
Maybe you're young and haven't used any credit yet...
Maybe you've recently come out of a bankruptcy or other tough financial situation. You may be tempted to pay for everything in cash not wishing to repeat your past mistakes...
Maybe you think that debt is bad and have always paid for everything with cash... (I've got a friend like that. At the age of 35, when he tried to buy a house, he had no credit history whatsoever!)
Many people think that being debt-free is a positive trait valued by lenders. Nothing could be further from the truth. A borrower with no credit is almost as bad as one with bad credit. A creditor wants to see a history of how you handle debts. A person just out of a bankruptcy needs to show potential lenders that they have learned their lesson and are now committed to improving their credit habits.
Building or re-building a credit report is not a quick-fix situation. It takes a year or two to complete. Don't fall for promises of a "glowing report in a matter of weeks" from credit repair agencies or other scammers. Just follow the basic outline presented here.
1. Clean Up Your Credit Report as Much as Possible
First, you must make sure that your credit report is as clean as you can get it. Begin by obtaining a copy of your credit report and examining it thoroughly for errors. Having your report in tip-top shape will help you immensely when you begin to apply for new credit. See our section on credit repair for more details on how to fix any errors you may find.
2. Get New Credit
Once you've cleaned up your credit, you are ready to start building a positive credit profile. Follow any or all of these techniques to stack your report with A-1 listings. But be prudent. If you stack too many open accounts, you may be denied new credit based on your debt-to-income ratio; if you show excessive credit inquiries, you may be denied for that. If you already have a problem with excessive credit inquiries, see the Erase Credit Inquiries file in this Web site.
Piggy-back on a Friend
If you know someone (a good friend or parent) who has good credit, you can "borrow" their good credit listings. This friend must have credit cards and must trust you enough to allow you to become an "authorized user" on his card. Have your friend call his credit card company and request that you be placed on his card as an authorized user. A copy of the card will be sent to you but you never have to use it (you can simply return it to your friend). Your credit file will should soon show an open account with all of the positive history that your friend has created over the years from that credit card. A small footnote will show that you are an authorized user of that card. Remember, though, when a new credit grantor reviews your file, he may insist that the balance on the card appear on your debt-to-income ratio balance sheet. That shouldn't disqualify you for credit if your income is sufficient and you don't have an excess of debt on your file.
Get a Secured Credit Card
Ask your local bank if they offer secured cards. Many national banks are starting to offer this service. Your past credit is less important with these guys as you will be opening a savings account to secure the credit line on the card. You can get this card even if you still have some bad credit on your credit file. By putting $500.00 into a savings account, you will be allowed to charge up to $500.00 on the card.
Seek Easy Credit
Many stores extend credit without tremendous regard for the credit standing of the applicant. These stores usually can be found in industries with small products or traditionally high mark-ups. Here are a list of creditors who will often extend credit to those without much credit history:
- Fingerhut
- Radio Shack
- Jewelry stores
- Furniture stores
- Tire stores
- Appliance stores
- Easy credit auto dealerships
- Gas companies
3. Keep the Accounts Active
Once you've successfully received new lines of credit, it is important to have some activity going on each month. We don't suggest you pile up large debt-- maybe $50 dollars or so in a balance. Pay the minimum when the bill arrives even though it will cost you a little in interest charges. And pay it on time. This is what future loan officers and other creditors want to see. (Inactive accounts with a zero balance aren't displaying a tendency to handle existing debts.)
You need to display at least one year of positive credit habits to be taken seriously, especially by a mortgage company. Start now or you will always be a year or two from a good credit standing.
