It’s a catch-22 situation: you need credit to get credit. And if you want to buy a house, you need to have good credit. Although fixing a bad credit score is difficult, establishing a good one from a clean slate is fairly easy. This means for first time home-buyers, there is hope. Those three digits can halt your home-buying dreams if they’re not up to par, so read on to see how you can build good credit from the beginning and make your dreams a reality.
Let’s start with credit 101. As mentioned above, you need credit to build credit, therefore applying for a credit card is an easy way to do this. Whenever you apply for a credit card, 90 percent of lenders check your FICO credit score over other types of credit scores. Your FICO credit score grades your credit history based on the following: The length of your credit history, the different types of credit you have and any recent lines of credit make up 35 percent of your score; your payment history makes up another 35 percent; and the amount of debt you have makes up the last 30 percent. The closer your score is to 700, the better. Anything under 600 is considered a bad credit score.
When applying for a credit card, you should be primarily concerned with the card’s annual percentage rate (APR). Take that rate and divide it by 12 to determine the amount of interest you’ll pay per month. If you plan on paying your card off every month, APR won’t be as much of a concern. But if you’re only able to pay a portion of the balance each month, APR is important as interest can accumulate fast.
Unfortunately those without credit can’t just apply for any credit card out there. Below you’ll find two types of credit cards that are available to help you build credit from nothing.
Retail Credit Cards
Retail credit cards are easy to obtain for credit-less adults. However, they tend to have the highest interest rates around, often reaching 27.99 percent. But, if you use this card responsibly, it can be a gateway to lower-interest cards with better benefits. The trick is to pay off the entire balance each month (if you can) to avoid digging yourself in deep with that high interest. Before you know it, you will have a great credit score and start receiving offers for “legit” credit cards.
Secured Credit Cards
If you have no credit or bad credit, secured credit cards can help you build a good score. Secured cards usually have looser approval requirements with an APR lower than that of retail cards. These cards typically have an annual fee, but are probably your only option.
This alternative credit card, offered by most banks, allows you to open a line of credit by putting down a cash deposit of a couple hundred dollars. If you put down a deposit and meet all of your monthly payments within the year, you will get your deposit back plus a full-fledged line of credit. In some cases, the banks will even allow your deposit to grow interest.
While credit cards are an easy way to build credit, they are also an easy way to build bad credit. Once you build your credit, the easiest way to maintain a good score is this:
• Never miss a payment – Missing a payment can lead to late fees and increased APR, and will bring your score down.
• Pay more than the minimum – Minimum payments keep you in the clear, but don’t do much to fight the interest growing on your balance. Pay as much as your budget allows, even if that means adding an extra 10 bucks to the mandatory minimum payment. This will bring your score up.
• Always check your score!