Bob needs to learn about how to build credit, and he’s not really sure what that means so he goes to talk to the experts.
The Basics of Building Credit
Secured Credit Cards
Bob finds out the value of getting a credit card when building his credit score from scratch, and it starts with a secured credit card. A secured card is backed by a cash deposit you make upfront; the deposit amount is usually the same as your credit limit.
Bob can use the card like any other credit card: Buy things, make a payment on or before the due date, incur interest if he doesn’t pay his balance in full. His cash deposit is used as collateral if Bob fails to make payments. Bob will receive the deposit back when he closes the account.
Secured Credit Cards have better rates because they are secured to collateral.
Secured credit cards aren’t meant to be used forever. For Bob, the purpose of a secured card is to build his credit enough to qualify for an unsecured card — a card without a deposit and one with better benefits.
Credit-Builder Loan
A credit-builder loan is exactly what it sounds like — its sole purpose is to help people, like Bob, to build credit.
Typically, the money Bob borrows is held by the lender in an account and not released until the loan is repaid. It’s a forced savings program of sorts, and your payments are reported to credit bureaus. These loans are most often offered by community banks because of the personal relationships built.
Get A Co-Signer
It’s also possible to get a loan or an unsecured credit card using a co-signer. For Bob, that’s his dad. But be sure that you and the co-signer understand that the co-signer is on the hook for the full amount owed if you don’t pay. In his case, Bob will have dad to deal with if he defaults.
Practice Good Credit Habits
Here’s what Bob will need to understand about how to build credit:
- Make 100 percent of payments on time, not only with credit accounts but also with other accounts, such as utility bills.
- Keep your credit utilization low — utilization is your balance when compared to your limit. Bob should pay his credit card balance in full each month.
- Keep accounts open for as long as possible. Unless one of your unused cards has an annual fee, Bob should keep them all open and active for the sake of your length of payment history and credit utilization.
- Bob needs to check his credit reports at least annually for errors and discrepancies. Learn how to check your credit scores and reports. A credit report is a record of how you’ve used credit in the past.
Want to know what Bob learned about how to build credit? Check out Bob’s video or give us a call and we will walk you through the same lesson.
Bob’s building credit video was produced by 2188 Studios, a small Michigan production company led by Ben and Lucas Daniels based in Chelsea, and directed by Michigan native Jeff Daniels, with actors from the Purple Rose Theatre Company in Chelsea.
