Establishing Good Credit is Easy!
If you have no credit or, no existing active credit accounts, it will be quite hard to get approved for a mortgage. There are several ways to establish credit but I believe the best way is through a credit union. The reason I say this is that credit unions actually build relationships with their members and as a member you get great rates on auto loans and other types of consumer credit.
However, before you join a credit union, make sure to find out if they report their share secured accounts to all three credit bureaus as some only report to two of the three. Plus, if you let them know that you are trying to establish good credit they will be more than happy to help you.
If you already belong to a credit union, great just follow the directions below! If not, join one by opening a savings account and follow the directions below.
You will be asking the credit union to open two share secured accounts. A share secured account is basically a collateral account for you to borrow against. The two types of accounts you want to open are an installment account and a revolving credit account.
The installment account is a term loan that is paid off in a specific period of time and a revolving account is like a credit card. The reason you want two share secured accounts is that credit diversity is important when establishing good credit and having an installment and revolving account will give you that.
Share Secured Installment Account
This is how a share secured account works for installment accounts. You deposit $500 into a share secured account and the credit union gives you an installment loan for $500 with an interest rate of 10% and a repayment term of 12 months. You pay $44.19 per month for the next 12 months until the loan is paid off.
At any point that you pay off the loan, you can get your $500 deposit back. This will cost you under $50 in interest and fees and it's well worth it for the establishment of credit and an increase in credit score.
Share Secured Revolving Account
This is how a shared secured account works for revolving accounts. You deposit $500 into a shared secured account and the credit union gives you a credit card with a $500 credit limit. Anything you charge on that card will accrue interest if it is not paid off when it is due.
You will want to use this card monthly for things like gasoline or whatever you like. However, you will never want to carry a balance higher than 30% of your credit limit because that can lower your score. So if your limit is $500, don't carry a balance higher than $150 on the card.
We've used this strategy to raise a client's credit score by as much as 60 points in less than 45 days. This allowed her to put an offer in on the house of her dreams before another buyer could beat her to it.
Secured Credit Cards
You can also achieve similar results by obtaining a Secured Credit Card. However, Secured Credit Cards have some pretty ridiculous annual fees and application charges so I've found the credit unions to be more customer oriented.
Authorized User Accounts
Back in the good old days you could ask a friend or relative to add you to one of their good credit accounts as an authorized user and you could piggy back onto their good credit. Unfortunately, this no longer offers a big benefit on mortgage credit reports as the credit score algorithm is programed to remove these accounts prior to scoring.
Repairing Derogatory Credit
If you missed my other article on repairing derogatory credit on your credit report, you can access it by clicking on the button below.