Build Your Credit from the Ground Up

Written by Ron Gross
Published February 11, 2019
credit basics and how to build your credit when you have none credit basics and how to build your credit when you have none

Credit-Building Basics

Before you start building credit, you should at least have a basic understanding of what it is and why it’s important. Credit is money you borrow from someone or an institution that you have to pay back at a later time, usually with interest. This is essentially how credit card companies make their money. Sure, they make some money on fees but the interest on the borrowed money is their bread and butter.

The Infamous Credit Score

Then there is your credit score, which is based on how likely you are to pay off your loans. Those who have proven that they pay their loans consistently and on time will benefit down the road when they go to buy a house or a vehicle. They will be able to do so with lower interest saving thousands of dollars in the long run just by having a very high credit score.

The Big Three Credit Bureaus

Your credit score is typically pulled from one or all of the credit agencies (Experian, TransUnion, and Equifax). Each credit bureau uses a proprietary algorithm that actually does all the calculating. It factors in things like the depth of your credit history, how well you’ve paid off your loans, how much current debt you have, and what your available credit currently looks like. After all these things are put through their system, each of the credit bureaus will assign you a credit score, ranging from 300 to 900 and is used to tell creditors how likely you are to pay back a loan. Remember, since each bureau uses a different algorithm to determine your score and not all creditors report to all credit bureaus, your score may differ between each bureau. The higher the score the lower the interest rate you’ll have to pay.

The Benefit of Credit

Why use credit in the first place? Why not just pay everything in cash? The benefit of credit is that it gives you the ability to pay for large purchases over time like student tuition, a car and ultimately a home. You have to factor in paying interest, so planning is essential. Use credit only to make necessary purchases. Creating a solid budget will help you stay on track, pay off loans on time, and manage your credit history wisely.

Building Positive Payment History

Start with Secured Credit

Since 35% of your credit score is determined by your credit history, there is no need to wait till after graduation to start creating that history. There is no better way to build credit history than with a credit card or a loan. This may be a bit tricky since you have no credit history to start with, but secured credit can help. Secured credit accounts work by putting up your own money to use as collateral. Why? Because, financial institutions see you as a high risk since you don’t have any credit history to tell them otherwise.

Build Credit with a Secured Loan

The easiest type of loan to start with is a secured loan, which is where you begin with an initial deposit (usually $200-$500) of your own money. You put this money in a savings account or a certificate of deposit (CD). You then get a loan for the amount you initially deposited. The creditor will put the funds on hold in the savings or certificate, so you can not withdraw them.

Finally, you decide on the term you like. 12-months is a good way to start, because you get the most impact on a year’s worth of on-time payment history on the loan. As you pay down the loan, the savings amount comes off hold in the amount of what you paid down the loan.

Basically, you are borrowing against your own money. Why would you do this? Because, every month the bank reports to the credit bureaus your record of making your monthly payments on time.

The interest rate is relatively low as it is usually only 2% or 3% above the savings or certificate rate. So, for example, put $1200 in savings, take out a $1200 loan and pay back $100 a month plus the interest each month for a year.

Diversifying with Secured Credit Cards

In order to substantially build your credit score, you’ll need diversity in your credit history. This means that you need to build credit from different types of credit accounts. The good news is, just like the secured loan, you can build your revolving credit history with secured credit card. This is how a secured credit card works: you will go to your bank, fill out an application for a secured credit card, and deposit at least the minimum (which in most cases is about $200 - $500). The bank in turn will give you a credit card that has a credit line that’s equal to 50% or sometimes 100% of the amount you deposited. Make sure though that you keep your balance under 30% of the credit line, 10% is ideal. This will maximize the effect of what it can do for your score. Just be aware that high balances do the opposite and will hurt your score instead of improving it. After a year or so of consistent on time payments, you should ask for a credit increase or ask to be granted an unsecured (no initial deposit required) credit card. You are now on your way to building good credit history.

Note: Be aware that many secured credit cards require an annual fee and come with a high APR (Annual Percentage Rate), from 15-27%. Other fees may apply like application fees and sometimes processing fees. Credit cards are also easy to max out, which is why you might want to consider a secured loan first.

Student Loans and Your Credit

Going to college is a large expense, with the responsibility of paying tuition, books, and housing. How are you going to pay for it all? Many students and parents turn to loans and credit cards even after scholarships and other financial aid have been awarded, because it so expensive. You can work full time and go to night school and still not have enough, so this is where most people’s credit history begins.

Student loans most likely will be your first big loans, but they don’t help your credit until you start paying on them after graduation. It’s not how much you owe that matters with student loans, it’s how well you pay them back that matters to your credit.

Get Help from Your Parent’s Credit

Get a parent to co-sign. When applying for a credit card or a loan, you can get a parent or a relative to cosign the application, essentially using their credit history and employment status to get you approved for a credit card. Getting an unsecured credit card bypasses having to deposit money up front as in a secured credit card. The kicker here is that if the loan doesn’t get paid and it goes into default, it’s a strike against your credit and theirs.

Begin Building Your Credit With CUTX

The Credit Union of Texas (CUTX) is a good place to start building your credit. CUTX offers secured savings, secured certificate of deposit loans, and secured credit cards. If you have a savings account with us, you can use the funds in your account for a secured credit card.

Start today building a good credit history. Come into one of our CUTX locations and speak with one of our staff. You can also call 1-972-263-9497 and speak with a member of our loan team about our different credit and loan offerings.