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How to Bootstrap Your Credit for Free — or Cheap

Credit Card Basics, Credit Cards, Credit Score, Loans, Personal Finance
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How to bootstrap your credit

When Bo Amusa set out to improve his credit, he didn’t start by looking for a co-signer.

“I wanted to [build credit] independently because I’m just an independent person. That’s my mentality,” says Amusa, 27, of Atlanta. He wrote about how he bumped up his poor credit on his blog, Young Income.

Building credit on your own, as Amusa did, isn’t as simple — and often not as cheap — as piggybacking on your parents’ good credit or finding a co-signer. Many lenders reject borrowers with poor or limited credit. And products that promise easy approvals — “Bad credit? No credit? Low score? No problem!” — often charge hundreds of dollars in unavoidable, nonrefundable fees.

Amusa went with a more affordable option. In 2013, while working at his first job out of college, he put down a deposit for a secured credit card. By paying it on time and keeping his balances low, his credit improved. Within six months, the bank refunded his deposit and upgraded his account.

If you’re building or restoring credit independently, like Amusa, you can do it for a reasonable cost. Here’s how to get started.

Get a credit card

Don’t settle for a credit card that continually drains your bank account with huge fees. You can do better — even if you’re starting with poor credit. Just keep in mind that if you’re under 21, you’ll need an independent income to qualify for a credit card without a co-signer. Here are some options worth considering.

Secured credit cards

Unlike “regular” credit cards, secured cards require a cash deposit, which is usually equal to your credit limit. For example, if you put down a $300 deposit, you might get a $300 credit line. You get your deposit back if your account is upgraded to an unsecured card or you close the account in good standing.

“I just figured I’d start small, with $300,” Amusa says, noting that it was the lowest deposit his bank allowed. “After six months, I graduated to a regular credit card, and they refunded me that money.” Within that time, he adds, his score increased from the mid-500s to the mid-600s.

Total first-year cost: $0 to $35, assuming you get the deposit refunded within the year and pay in full every month. Minimum deposits vary by issuer, generally ranging from $49 to $300. The remaining cost depends on the card’s annual fee.

Store credit cards

These cards offer in-store benefits, report your borrowing activity to the credit bureaus and don’t charge annual fees. Many also approve applicants with poor or average credit or limited credit history. The downside: They tend to come with steep interest rates. You can avoid interest charges by paying your balance in full every month.

Total first-year cost: $0, assuming you pay in full every month.

Credit cards for international students

If you’re an international college student, applying for a card like the SelfScore Classic Mastercard may be your best bet. This card, which doesn’t require a deposit, co-signer or Social Security number, reports monthly payments to the Experian and TransUnion credit bureaus. It doesn’t charge an annual fee or require a deposit. After about six months of responsible borrowing, you might get upgraded to the issuer’s rewards credit card.

Total first-year cost: $0, assuming you pay in full every month.

Apply for a low-cost installment loan

Having two types of credit can help your credit even more, because “credit mix” is a factor in scoring. You might want to add an installment loan, meaning one with level payments and a defined repayment end date, such as a car loan. If you aren’t looking to make such a major purchase, consider these options:

Credit-builder loans

As their name suggests, credit-builder loans exist to help people build credit — and they help build savings at the same time. The amount you borrowed is held in a bank account while you repay the loan, and your on-time payments build your credit. When the loan is paid off, the money is released to you, minus interest charges.

Total first-year cost: Varies, based on interest rates. Setup costs range from $0 to $12.

Share-secured loans

See if your credit union or bank offers loans against your account balance or certificate of deposit. The amount you borrow is frozen until you repay the loan. These loans can let you use money that’s tied up in a CD, or simply help you build credit. If you’re doing it strictly to build credit, borrow the smallest amount you can and consider automating payments so you’re never late. Interest rates tend to be low.

Total first-year cost: Varies, based on interest rates. Accounts are generally free to set up for bank or credit union members who have money on deposit.

Get your good habits reported

Rent reporting

Housing payments help your credit if you have a mortgage. But what if you’re renting? You or your landlord can’t report rent directly to credit bureaus, but rent reporting services now fill that gap. Be aware that not all rent reporting companies report to all three major credit bureaus, and not all credit scoring models include rent in the calculation even when it is reported.

Total first-year cost: $0 to around $165 for basic reporting services. Through some programs, property managers cover processing fees. Other programs charge tenants monthly fees.

Check your progress

Federal law entitles you to a free copy of your credit report from each of the credit bureaus every year. Access your reports at AnnualCreditReport.com. It’s smart to get in the habit of checking them. They contain the data used to calculate your credit score.

If you pay on time, every time, you should see your efforts pay off. You can monitor your credit score for free, with updates weekly, on NerdWallet.

What to expect

The buck stops with you. When you’re building credit independently, you might not have someone constantly nudging you to swear off bad borrowing habits. It’s up to you — and only you — to stick to a budget and remember due dates.

Building or restoring credit takes time and effort. Working toward good credit means showing lenders that you:

  • Pay on time every month
  • Stay well below your limit on credit cards
  • Keep accounts active

You might not see the fruits of your labor right away. If you’re new to credit, for example, you’ll need to have at least one account reported to the credit bureaus for six months to get a FICO score. You’ll likely get a VantageScore sooner. Restoring damaged credit might take longer.

Credit-building products aren’t always worth keeping long term. Products like secured credit cards and credit-builder loans can help open the world of credit for you. But after qualifying for more favorable credit terms elsewhere, it generally doesn’t make sense to continue paying for them. To save money, close unused or unneeded accounts that have ongoing fees or refundable deposits.

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