How to Build (Or Rebuild) Credit From Zero
When my husband immigrated to the United States, he had no credit history. By using the strategies below, his score reached 790 in less than 3 years.
Who needs a secured credit card?
We all know that your credit score is important. If your credit score is already above 700, check out my guidelines in “How to increase your credit score”, to give your score an extra boost.
But what about those of you with scores below 700? Below 650? Below 600? Or those of you that have no credit history at all?
When my husband first moved to the United States he had ZERO credit history. Even though he had good credit in his home country, that didn’t transfer to the American credit system. He had to start from the beginning.
If your credit score is below 700, or you have no credit score, a secured card is a great option to start to build your credit score. These cards are made to help you build credit, so even if you have poor credit or no credit, you can likely still get approved.
My husband has now lived in the United States for about two and a half years, and his credit score is nearly 800. I’m going to show you the steps that we took to get him there.
Become an authorized user
The very first thing I did was add my husband as an authorized user to my oldest credit card. An authorized user is a person that has permission to make purchases using your card, but they are not responsible for making payments. He received a card with his name on it, and he could use it to make his own purchases. However, even if he wasn’t using the card to make any purchases, simply being an authorized user on the card meant his credit report now had seven years of history and over $10,000 of “available credit”.
If you know someone that is willing to add you onto their credit card as an authorized user, this can be a great first step. But, make sure the person you ask uses their card responsibly and pays their bills on time, otherwise it could end up hurting your score again.
Open a secured credit card
Being an authorized user is a great first step, but eventually you really need to have credit in your own name to properly build your credit score. Opening a secured credit card is an incredible tool for building credit.
The main difference between a regular credit card (also called “unsecured”) and a secured card is that the secured card requires a cash deposit to open. Essentially, you give the bank a lump-sum of cash, and they use that money to “secure” or collateralize your card. If you fail to pay your bill, they use that money to pay it for you.
Typically, the amount of the lump-sum is limited to around $1,000, which is also your credit limit. For example, if I open a secured credit card with a $1,500 deposit, my credit limit is also $1,500. If I fail to pay my bills, the bank will keep my $1,500.
After about 6 months of showing the bank that you can pay your bills on time and in-full, the deposit will be returned to you, at which point the secured credit card gets “full card” status (not all cards transfer you to a regular, unsecured card, but many do so look for these ones before applying).
After my husband had used his card and paid it in full every month for seven months, his deposit was returned and his card was upgraded to “unsecured” status. At this point, he applied for a credit limit increase, which he received. He also applied for a new credit card with another company, which he was approved for, since now he had more history in his credit report.
*Bonus tip:
All credit cards have what is called a “utilization score”, which is how much of your credit you use for expenses. Basically, the more money you spend, the closer you are to your credit limit, and the higher your utilization score. High utilization score = bad. If your secured credit card deposit is $1,000, try to spend less than 30% (or $300) every month. If you can do less than 10% ($100) that’s even better. Having a low utilization score will turbo-boost your credit score.
PROs of secured credit cards
You don’t need great credit to qualify. Since the card is opened with a deposit, someone with low credit or no credit can usually qualify.
In terms of making purchases, it acts the exact same way as a regular credit card. Simply swipe or tap your card in the check-out line. Put in the card information for online purchases.
Many cards also offer theft protection, meaning if your card is stolen you won’t be responsible for any unauthorized charges.
You can build, or rebuild, your credit using a secured card, helping you to later qualify for an unsecured card with better benefits.
Often your secured card can be updated or “graduated” to an unsecured card after several months of on-time payments.
CONs of secured credit cards
The biggest con is the lower credit limits. Credit limits for secured cards are often between $200 and $2,000.
You also need to make a deposit up front before you can open an account. These deposits are usually between $200-$2,000, depending on the credit card and your desired deposit. If the card offers a $2,000 credit limit, but you only have $500, you should be able to open the card with the $500, but you won’t be able to spend more than that.
Interest rates can be high (25%+). The bank considers people with secured cards “riskier” because they think you will default on the payments. If you do miss a payment, or are late on a payment, you’re likely to get hit with a very large APR. You won’t have to worry about this at all if you pay your bill in-full and on-time.
Secured card vs. prepaid card
With a secured card, you have to make a deposit to open the account. The amount of that deposit is also equal to your credit limit. However, that deposit isn’t used to make your monthly payments (unless you miss payments, then the bank will use that money).
A prepaid card is more like a gift card. You put a deposit onto the card, and then use that money to make payments. Additionally, prepaid cards are not reported to credit reporting agencies, so using one will not help improve your credit score.
Action items:
If you know someone responsible and willing, ask them to add you as an authorized user to their card. You don’t even need to use the card. Keeping it in a drawer at home will still help build your credit as long as the primary owner is using it responsibly and paying their bills on time.
If you have a credit score below 650, or no credit score at all, you may benefit from a secured card. Do some research on the different options out there. The card my husband opened had a $2,500 deposit/credit limit, 2% cash back, and it upgraded to an unsecured card after 7 months of on-time payments. There are some great options for secured cards out there.
Keep your balances low. If you can open a secured card, try to only use it for a few small purchases every month, and use your debit card or cash for the rest. Keeping your expenses on the card low (Ie - not getting close to your credit limit) will give your credit score a huge boost.
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
