If you watch a lot of TV, it may seem like Americans are obsessed with their credit scores. Remember the ubiquitous freecreditreport.com ads? “F-R-E-E. that spells free.” Go ahead, watch them all, we’ll wait.
Sure, if you’ve applied for a car loan or mortgage lately, chances are you know roughly what your credit score is.
But what if you haven’t needed credit? That’s the situation my friend Chris finds himself in. He’s a 30-year-old professional who doesn’t own a car and, apart from some school loans, hasn’t needed to use credit. That’s admirable — no credit card means no credit card debt — but he knows good credit is essential to his future dreams of owning a home and starting his own business.
There’s a bit of mystery that sometimes surrounds credit scores, so I first had him find out his exact number. My favorite way to do this is through the free budget tracker Mint.com. Among its many valuable features, Mint tracks your credit score for you, automatically updating it each quarter, and even breaks out the elements that affect it so you know exactly what you need to do to move it higher.
According to Credit.org, a score below 620 makes it less likely you will be approved for a standard credit card. With his limited credit history, this is where Chris finds himself. Let’s take a look at his options for boosting his score.
The Friends and Family Plan
A pretty quick and painless way to raise your credit score is to ask a friend or family member with excellent credit to add you as an “authorized user” on their existing credit card account. Their credit account and related credit history will then show up on your credit report just the same as if you held the card yourself.
This is how I built up credit as a college student, and how I helped my former husband rehab his poor credit. It’s a very effective strategy, and your benefactor never even has to give you access to the actual card.
Sound too good to be true? There are some caveats. You have to have a high degree of mutual trust for this to work — a missed or late payment by either one of you will hurt the other’s credit, and if the primary card holder racks up a high amount of debt, that could hurt you too. And of course, if the primary card holder gives you a physical card and you charge something to it, they are legally responsible for paying for it.
Secure Your Future
Not quite as simple, but equally effective is to get a secured credit card. With a secured card, you deposit cash, usually $200 to $300, which is held in a bank account as security in case you don’t pay your bills. You can usually spend only up to the amount you have deposited, though some cards will gradually increase your credit line after several months of on-time payments.
The good news? Your credit score doesn’t know the difference between a secured card and a regular one. As long as you pay your bills on time, your credit score should improve.
I recommend using this type of card to auto-pay a bill you already have, such as your mobile phone bill or your Internet bill. That way, you’ll have monthly activity on the card and you’re not tempted to charge purchases you wouldn’t otherwise. To be extra safe, set up a second automatic payment from your bank account to the card each month to be sure it gets paid on time. Mint comes in handy here — if you link your card to it, Mint will remind you when the bill is due.
The bad news? Most of these cards come with annual fees, ranging from $19 to $49, don’t offer much in the way of extras and have double-digit interest rates. Of course, you’re going to pay the bill in full and on time every month, so that won’t be a problem, right?
Here are a few to consider (see a longer list at CardHub.com):
- If you can part with $300, no fees and the cool factor make the Harley Davidson (HOG) Secured Visa (V) a great choice. It even comes with a few extra perks, including a reward program for Harley purchases.
- If you have limited cash on hand, try the Capital One (COF) Secured MasterCard (MA), which lets you get a card with as little as $49. This card is one that will reward your on-time payments with a higher credit limit over time, but be careful that you don’t charge more than you can pay off each month.
- If you are eligible for USAA membership (limited to those who have served in the military and their families), check out the USAA Secured Card Platinum MasterCard. It has an annual fee of $35 but comes with some useful features, such as travel and car rental insurance, and it has particularly good terms for active military members. USAA stashes your deposit amount (anywhere from $250 to $5,000) in an interest-bearing CD account.
No matter which option you choose to build your credit, there are a few key rules that will keep your score heading northward.
- Pay your bill on time, every time. No exceptions! When you’re in credit-building mode, ideally you will pay the bill in full each month, but even if you have to pay the minimum due, on-time payment is the golden rule of good credit.
- Keep your credit usage low. Credit usage refers to the percentage of total credit you have that you are actually using. Creditors don’t want to see you maxing out those cards, even if you’re paying on time. You want to keep this number under 20 percent.
- Don’t go card crazy. As your score rises, so will the number of card offers that show up in your mailbox. It’s tempting to apply for these cards, but be selective. Too many applications will damage your newly improved score. Once your score is in the high 600s (considered in the “good” range), choose one unsecured card with a reasonable interest rate (under 15 percent) to replace your secured card. Regardless of the rate, continue to try to pay off the card each month. If you’ve gone the authorized user route, now’s a great time to get a card in your own name and let the primary card holder off the hook. Either way, continue to use your new card just as responsibly.
Robyn Gearey is a Motley Fool contributing writer. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.