The CFPB released a report stating 45 million Americans don’t have any current credit reports or scores. The reasons range from never owning a single line of credit (no credit cards or loans) to having credit at some point but the information being too old to be considered reliable. The CFPB also determined those who are credit invisible tend to be low-income, which indicates a likelihood of having reduced access to credit.
Being credit invisible can prove to be a major problem regardless of your economic background. A low, or non-existent, credit score makes it nearly impossible to qualify for quality financial products. This leaves people in need of a loan with limited options – many of which are predatory such as payday and title lenders.
The only way to begin building a credit score is to take on a line of credit. This doesn’t mean needing to dig into debt. Instead, you can establish your credit score by getting a credit card or a secured credit card.
Establish Credit without Debt
A properly used credit card never needs to lead to debt. It’s a way to establish credit history and build a 700+ credit score by showing you can handle borrowed money responsibly.
There are three steps to using a credit card well and never going into debt.
Step 1: Get the credit card (or secured credit card)
Step 2: Make purchases that are no more than 20% of your total available credit. For example, if you have a $2000 credit line you should only spend $400 or less each month.
Step 3: Pay off your bill on time and in full
If you get in the habit of not paying your bill in full and only paying the minimum due, it will get you into debt and you’ll end up owing money in interest back to your credit card company.
Get a Secured Card
There is a high likelihood that credit invisibles will not be eligible for a regular (unsecured) credit card. The lender will do a risk analysis and will be wary of giving you money without proof you have historically paid on time. Instead, you’ll need to start with a secured card.
A secured card works just like a credit card except you put down a deposit. This deposit typically also serves as your line of credit. So, if you put down $200, you’ll have a $200 line of credit.
For the next year, you should only use the secured card to make one or two small purchases ($5 or $10) each month. Then be sure the bill is paid off on time and in full each month.
You’ll see that your credit score will be building during this time. It may take more than a year to get to a 680 or higher credit score, but just keep at the process of making small purchases and paying them off.
Once you get to 680, you can apply for a regular card and ask to have your secured card converted to an unsecured (regular) credit card. At this time you’ll also receive your initial deposit back, assuming you’ve paid your bills and don’t owe any money to your credit card lender.
Continue Maintaining a Healthy Score
You can keep your credit score strong and healthy after transitioning to a regular credit card as long as you maintain the same habits.
- Never spend more than 20% of your available credit
- Pay your bill on time each month
- Pay your bill in full each month
Get in the habit of keeping tabs on your credit score and (just as important) credit reports. You’re entitled to a free copy of your credit report from the three bureaus (Equifax, TransUnion and Experian) once a year. You can get those by going to annualcreditreport.com. We also maintain a list of all the places you can access your credit score for free.
It’s important to keep up a strong credit score (700+) so you can always be eligible for the best financial products. Emergencies will happen and you never want to feel forced into turning to a payday or title loan lender in order to finance the unexpected. A strong credit score can make you eligible for a personal loan with a much lower interest rate, or to have a line of credit established with a credit union or to do a balance transfer if you charge an emergency to your credit card.
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