Credit can be a circular term. To build credit you need to get credit. But, if you have no credit you can’t get credit. If you have bad credit you can’t get good credit.

So where do you start?

The majority of individuals in today’s world obtain credit through friends and family who co-sign for them. While this is a pleasant thought many individuals either do not have this option or they wish to be “credit-self-sufficient”. Why trust your financial reviews to someone else? If the person you co-sign with makes a mistake, such as misses a payment on a credit card or loan, you are held liable.

To build credit on your own keep it simple.

There are two types of credit cards.

1) Un-Secured Credit Cards – these cards are commonly the offers you receive in the mail stating “You’ve been Pre-Approved!”

What you don’t know is this… You are NOT pre-approved. You were one of thousands who received this notice because you reside in a particular area. This company has likely not evaluated your credit or looked into your credit history. When you reply to this “pre-approval” for a credit card you will have a hard inquiry done onto your credit (hard inquiries – are pulls onto your credit which adversely effect your scores causing a ten point hit and stay on your credit for two years). Once the hard inquiry is done there is no taking it back. The creditor (credit card company or lender) will then evaluate your eligibility based on the FICO scores they receive. If you are under a 640 FICO score odds are you will not be approved.

If you are approved for this credit card there is no guarantee the company will report your credit history with the credit bureaus. It costs companies money to subscribe to credit bureaus. As a result, most credit card companies and lenders only report to the credit bureaus when a consumer makes a mistake with their payments or maxes out his or her card. These companies are happy to punish you. They are not happy to reward you.

Unless it is in the contract that they guarantee to report every month to the credit bureaus; a un-secured credit card is never a good idea.

2) Secured Credit Cards – known as credit builder cards that are not offered without research and prompting. These are the number one way to build your credit and improve your FICO scores.

Secured credit cards are credit cards which do not care where your credit history or lack of credit history currently stands; they guarantee to report to all credit bureaus.  As long as you have an open bank account you will be approved.

In order to obtain a secured credit card you have to give an initial investment. Costs range depending on which company you choose (for instance, Capital One has a minimum deposit of $50 where as Bank of America has a minimum deposit of $500). After you give the investment the company will send you a credit card and report monthly on your actions to the credit bureaus. After twelve months, or when you close out the credit card, you will receive your initial deposit back. You should see your FICO scores increase every month as a result of this credit card.

How do you find this credit card? Which company should you go with? Suggestions below along with instructions on how to use the credit card properly (please note if you do NOT use the credit card properly you will not get the desired results!). This particular company listed below has been suggested due to research into their benefits and drawbacks in relation to other companies.

Obtaining a Secured Credit Card:

• Google “Capital One Secured Credit Card”
• Choose: Build Credit with a Secured Credit Card | Capital One
• Click “Apply Now”
• Enter in your personal information
• If possible, choose the $200 deposit – this will give you the largest and fastest increase in credit limit

The credit card will be mailed to you within seven (7) to ten (10) business days.

Once you receive your credit card:

• Spend between $1.00 and $5.00 on the credit card PER month no matter the limit of the credit card.
• Schedule a day and time to use the credit card each month into your phone or appointment book.
• Do not leave this credit card in your wallet. Put it someplace else so you are not tempted to use it.

Benefits of the credit card:

• The company guarantees to report to the credit bureaus every month
• If you keep your balance $5.00 or below every month you will see your scores increase by $500 every three (3) months.
• After a twelve (12) month period you will be reimbursed for your initial investment of $200.00
• At the end of a year you will show lenders you have access to multiple thousands of dollars and you use that access responsibly.
• Credit Tracker – you can sign up with Capital One’s free Credit Tracker which allows for FICO score monitoring (no hard inquiries or negative impact) – Click Here 

Drawbacks of the credit card:

• High Interest rates! You do not want to use this credit card for large purchases. Make sure you can pay off the credit card every single month with ease.
• Fees – fee’s for this credit card are constantly changing. One month there is an annual fee for the credit card the next month there is a monthly fee for the credit card. The fees are horrendous but, unfortunately, they are the best we have found in our research.

Note:

If you currently have no open accounts it is highly suggest that you open at least two (2) secured credit cards.

In order to obtain a mortgage you need to have three (3) open positive accounts with a credit history of a minimum of two (2) years.

Without positive open accounts your FICO scores are not likely to go higher than a 630.

3) Secured Loans – bankers like to push for these loans stating you will see your FICO scores increase. Secured loans have mixed reviews. While, yes, it will create a positive account onto your credit, they commonly require a large amount of money up front. The more money you give to open a secured loan the more debt you will appear to have.

What does this mean? Let’s say you open a secured loan with a local bank for $1,000. You give the bank $1,000 and the bank reports to the credit bureaus that you have taken out a loan with them and are paying monthly. What the bank doesn’t tell you (after it takes your money) is that you now appear to be in debt.

When your credit is evaluated the calculations take into account your debt to limit ratio. Credit cards will show you have access to money. Loans show you are in debt.

While your FICO scores may increase slightly from showing positive on-time payments, your scores will also reflect a higher debt ratio which adversely effects your scores. Instead of gaining 50 points after three months from opening the loan you will gain 20. Whereas with a secured credit card you can gain 50 points after three months and show access to a good deal of money.

Why do bankers push for secured loans? Money. The loan they give you will have an interest rate. In the end the bank will make quite a bit of money off you in relation to the interest rate plus they get a lump sum up front.