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Week 2: Credit Improvement
Day 11: Length of Credit History
Today’s Easy Financial Task: Learn strategies to lengthen your credit history.
How to rock this task:
- Find out what credit piggybacking is
- Review credit card and loan options for building credit
Day 11 Dream Catcher! Let’s dig into today’s task.
Today we’re going to talk about your credit history length and how to improve it.
Building credit can be a catch-22. You need access to credit to build credit, but some companies are unwilling to give you a chance if you don’t already have an established credit history.
Thankfully, there are a few ways to establish good credit history if you have little experience (or bad experience) using credit.
You may have heard of credit piggybacking before. It’s when someone you know who has a credit card in excellent standing adds you as an authorized user on their account.
As an authorized user, you take on all the benefits of their positive payment history because the account will appear on your credit report.
Here are some rules for choosing the right person to piggyback off of:
- The card you become an authorized user on should be at least three years old.
- The card should have a low balance.
- The card should have a perfect payment history.
- The card issuer should report authorized users to the credit bureaus, otherwise it’s a waste of time. (You can check what bureau the card issuer reports to by giving them a call.)
The good news about credit piggybacking is that you’re not responsible for the main account holder’s debt. However, a word of warning is necessary here. If the account that you piggyback on goes unpaid, it can negatively impact your score.
Since you’re not responsible for this debt, you can easily write into the creditor or credit bureau to have the account removed from your history.
Not just anyone with an excellent credit history is going to allow you to become an authorized user on their account, which is understandable. After all, they’ve put in the hard work building credit.
Who would want to risk someone coming along and racking up debt on their account as an authorized user?
Be mindful of this when asking someone to do you a favor. A parent, spouse, or close family member may be most willing to allow you to piggyback on their account. If friends and family are hesitant to add you as an authorized user out of fear you’ll go crazy with the card, suggest they keep the card and restrict your access to the account.
Make sure they’re also aware that your credit will not impact them when you’re an authorized user. This may sway the decision in your favor.
Credit Cards for Building Credit
If you don’t have access to someone that you can piggyback on to build your credit history, there are credit card options available to help you build credit as well.
For example, secured cards are cards that you can get approved for with no history or even poor history. A secured credit card is one where you put down a cash deposit (typically $200 to $500) which acts as your credit line.
Once you prove you can pay on time the deposit is eventually refunded, and the credit card issuer may increase your credit line.
To find the best secured cards:
1) Go to magnifymoney.com.
2) Search for secured cards.
3) Choose a secured card with no annual fee, a low-interest rate, and a deposit amount you can manage.
If you’re in school, college student cards are also available with lenient terms for those who are new to credit.
Although, you do want to be careful. If you’re a student taking out a card, make sure you have the means to pay off the balance at the end of each statement period. Don’t fall into the student credit card trap of using it to make all types of purchases that you can’t pay off. Revolving a balance to the next month can get you caught in the “debt shuffle.” You don’t want that.
When shopping for a student card or secured card, there are some important things to watch out for. Check to make sure that:
1) The credit card issuer won’t charge any crazy fees to start a credit card account.
2) The transactions and payment history on your credit card will be reported to all major credit bureaus. Your account activity being reported is what will help you build credit.
3) You’re getting a secured card or student card with a company, credit union, or bank that you plan to stick around with for a little while. Eventually, you may want to apply for a regular card.
Applying for a new card will count as a credit inquiry on your credit report and can stay on your report for two years. The inquiry may cause you to lose a few points on your credit score.
However, applying for a card to build credit can have benefits that will outweigh the brief dip in points. (We’ll talk more about the two types of credit inquiries and how they impact your score next week.)
Using Credit Builder Loans
A credit builder loan is another way to establish credit. A credit builder loan is one that you don’t get money from upfront. Instead, you have to pay off the entire balance of the loan first in increments. After paying off the loan, you get the lump sum of cash.
The purpose of a credit builder loan is to help people with no credit or poor credit prove that they’re able to make regular payments. Credit unions often have credit builder loans. If you’re a credit union member, reach out to customer service to find out whether this is a product you qualify for.
Self Lender is another lender that offers credit builder loans. If you qualify for a loan with Self Lender, the money is kept in an FDIC-insured CD account until you repay the debt.
A few things to note about this account:
- There’s a $12 administrative fee to apply for this loan
- There’s interest on the loan of up to 14.77% APR
Before applying for this loan make sure you understand the fine print. I wrote a full review of how Self Lender works on my blog. You can read it here: https://thebudgetnistablog.com/2016/new-credit-builder-tool/
A major part of building your credit history is the waiting game. Having a long credit history won’t happen overnight, but piggybacking and using cards or loans meant for building credit can help you along the way.
That’s it for today’s task!
If you have any questions or updates? Feel free to leave a comment below or reach out to your accountability partner(s).
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