In last week’s post, How to Buy a Car: How to Build or Fix Your Credit, Part I we talked about getting copies of your credit report, cleaning up old credit items, and piggybacking on someone else’s credit for a quick fix.
This week, we’re covering credit cards and credit builder loans.
Not All Credit Cards are Bad
There are lots of people who will be glad to tell you that credit cards are evil, that they never have one and they never will.
Should you listen to them?
The truth is a little more complicated. Credit cards are bad only if they’re not used properly. And some people just don’t have the discipline to use them properly.
So how should you use one?
Financial experts say that if you want to build credit, only buy things with your credit card that you would normally buy anyway, then pay the balance in full every month.
For example you could use it to buy gas for your car or to pay your electric bill. You should not use it for things like clothes or even groceries, because studies have found that even for purchases like these, you tend to spend more than you normally would if you pay with a credit card.
And then you absolutely must pay it off every month. Now, it won’t do you any good to make your credit card payment the day after you put something on it – you have to wait until your billing cycle to make sure you get credit for using credit.
You can pay it on your due date but it’s probably best to try and pay it a couple of days in advance. That way, you have even less chance of making a late payment. That’s the thing to avoid at all cost because then you’re moving backward in your work to build credit.
How to Get a Credit Card
If you have bad or no credit, it can be tough to get a credit card. There’s always a solution, though, and your best bet might be a secured card.
With a secured card, the card company requires a deposit equal to the amount they’re willing to offer as a credit limit. They might offer you a $300 limit, meaning you have to send them $300 first. That way, in the event of a default, they have that deposit to cover all of the unpaid balance.
You might also be approved for a low limit, unsecured card. In either case, without a good credit history, you can be sure you won’t be getting the best interest rate. But if you follow the plan and pay your balance in full every month, it doesn’t make any difference what your interest rate is.
There are a couple of gotchas to look out for, though, so it pays to spend a little time shopping around for a card. Some companies charge high annual fees for their cards and some charge minimum interest each month. Those are the ones to avoid.
CreditKarma.com and CreditSesame.com both have listings and advice for many types of credit cards. Keep in mind that they probably have arrangements with the card issuers so that they get paid when you apply, but they have some good tools to help you choose.
The Credit Builder Loan
The last strategy we’ll discuss is the credit builder loan. This is simply a personal loan from a bank, credit union, or other lender that you make payments on for the sole purpose of building credit.
You might be asking yourself, “How do you get a loan with bad or no credit?” Well, it can be done, and it’s not too complicated, but we mention this one last because it might require you to put together some money first.
Personal loans are tricky because typically they are unsecured, and lenders rely on nothing but good faith for repayment. And you might be able to get one, depending on your lender and current credit situation.
If you can’t get an unsecured personal loan, one method is to make a deposit with the lender and use that as collateral for the loan.
Collateral for Your Credit Builder Loan
Let’s say you can put together $500 or even $1,000. You can use that money to get a certificate of deposit (also known as a CD), which is a type of deposit that you are prohibited from withdrawing for a period of time, say one year. You’ll earn interest during that year – usually more than a regular savings deposit but often not much.
Then you pledge that CD as security for a loan in the same amount, for the same period of time. You then use the money you borrowed to make payments on the loan over that year.
At the end of that year, you will have paid off the loan and you’ll be able to cash in your CD. The only cost to you is the difference in interest between what you earned on your CD and what you paid for the loan.
But what if you can’t put together that initial $1,000? Well, there is at least one company out there who can help.
We mentioned SelfLender.com in our blog a few months ago, Build Credit for a Car Loan. These folks actually approve you for the loan then immediately put in into a CD for you. It’s a great method.
In their example, you get a one-year loan of $1,100 at a rate of 12.52%. Payments are $98 per month and interest totals about $76 for the year. At the end, you get the $1,100 dollars, which you could use as a down payment for your car loan.
Again, there are very few quick fixes for bad or no credit. It usually takes time and discipline to see these things through. We recommend using as many of these methods as possible because, as we stated before, a good mix of different types of credit helps your score, too.
Of course, you might not have time to implement all these before you need to buy a car. Lenders today are much more lenient, so you may be able to get a car loan without improving your credit much. Even though you will probably be paying more in interest, you’ll actually be improving your credit with each car loan payment you make.