Contributed by: Matt Trujillo, CFP®
In a previous blog I discussed how your credit report is composed and what goes into a credit report; I would encourage you to check out to find out how your score is calculated. Now, I want to discuss methods for improving your credit score, if you are unhappy with your current number, and/or establishing credit if you are just getting started.
First, let’s start by establishing how you get credit. If you want to establish credit, you need a regular source of income. The income can be derived from a job, trust fund dividends, government benefits, alimony, investment dividends, or any number of sources. What’s important is that you have some kind of continuing and predictable cash flow. Without regular income, you cannot demonstrate an ability to make regular payments. Establishing a regular source of income is your first step.
Once you have a steady source of income it is time to start applying for credit. If you are just starting out or are looking to repair credit, I recommend starting small. Here is a short list of ideas that you can consider for getting easy access to credit and slowly starting to improve or establish your score.
An overdraft line of credit on your checking account at your bank
- Here is how it works. You have a checking account. You apply for and are granted an overdraft line of credit in the amount of $500. Your checking account balance is $40. You write a check for $75. When the check is presented to the bank for collection, the bank does not return it for insufficient funds. Instead, it credits your checking account in the amount of $100. Now you have a balance of $140 in your account. The bank can honor the $75 check, leaving you with $65 in the account. The bank bills you monthly for the $100. You can repay the $100 all at once, or make minimum monthly payments. You will be charged interest and perhaps a service fee. Although it may not look like a loan, it is. Activity on these accounts is regularly reported by many banks.
Getting a secured credit card
- Many credit issuers offer secured credit cards. A secured credit card provides you with an open line of credit secured by a cash deposit. These types of cards typically come with a high interest rate. Here is how a secured credit card works. You give the credit card issuer a cash deposit. The credit issuer gives you a credit card with a credit limit equal to the cash deposit. You can charge up to the credit limit using the card, and then make monthly payments on the balance. If you fail to make the payments, the credit card issuer uses your cash deposit to cover the unpaid balance. If you make your payments as agreed, you will eventually establish credit (or improve your current score) and qualify for an unsecured credit card. The secured credit card issuer will return your deposit, less any unpaid balance due, when you cancel the account.
Using collateral when applying for new lines of credit
- When you secure credit, you give the lender collateral to back your loan. The risk is reduced for the lender. If you do not pay, the lender can use the value of the collateral to satisfy the debt. Collateral can be anything of value, but usually takes the form of cars or real estate. If you have something of value, but no credit rating, you may be able to acquire credit by offering to post your valuables as collateral.
These are just a few simple and easy ways to either establish credit or improve your credit score in order to build a credit report you are comfortable with.
Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matt Trujillo and not necessarily those of Raymond James.