If you’re new to managing personal finance and you’re learning about credit, you’ve come to the right place. Establishing new credit is a bit of a catch 22. To build a credit history, you need credit. But you can’t really get credit without having credit. So, where do you start?
Well, the first thing you should know is that building credit takes time. It’s not something that happens overnight. If you’re looking to secure mortgage financing, you will want to have a minimum of 2 trade lines (credit cards, loans, or lines of credit) with a minimum limit of $2500, reporting for a period of at least two years.
So if you don’t have any credit yet, the best time to get credit is right now. However, that might be difficult. Because as we’ve already identified, without a credit history, most lenders won’t feel confident about taking a chance on you. So, the best place to start is with a secured credit card.
With a secured credit card, you make a deposit upfront that matches the amount you want to borrow. A great place to start would be $1000 on a single secured credit card. You would then use your secured credit card to make purchases and regular payments. Paying off the total balance each month is the best plan. If for some reason you default on the money borrowed, the lender would take the money you put up as collateral.
When looking for a secured credit card, be sure to ask whether they report to the two nationwide credit bureaus, Equifax and TransUnion. If the credit card company doesn’t report, the credit card account will be useless for your purposes; move on until you find a company that reports to both credit bureaus.
Once your secured credit card has been reporting, and you now have a credit score; usually, this takes about 3 months, you can start to seek out a second tradeline, in the form of an unsecured credit card. Don’t forget to make sure that this card reports to both of the credit reporting agencies. A car loan would be another choice here.
But what happens if you’re looking to secure mortgage financing before you have a fully established credit report? Well, if you have someone who would consider co-signing, you can definitely go that route. The application will be based on their income and credit, but your name will be on the mortgage. Then when your mortgage is up for renewal, hopefully, you’ll have the established credit required to remove them from the mortgage.
So, although establishing credit takes time (a minimum of 2 years), it all starts with having a plan. If you’d like to discuss your financial situation and put together a plan that will get you into a mortgage sooner, please contact me anytime!