Bad Or No Credit? How to get started (or restarted)!

It has been a while since I have written about credit. It is a subject I know a good deal about from personal experience. I am pretty familiar with the US credit reporting and lending system and have used that knowledge to my advantage many times.

Today I am going to focus on building or rebuilding credit. Since we are in the midst of a recession there are more folks out there that have to start over. With banks and credit card companies becoming more and more strict on who gets approved we have to be more creative in order to get started.

There are a few options for those trying to build a credit track record. Even in today's tough credit world you can still find these. Here are my suggestions:

• CD Secured Loan - This has been around for a while. It is the least risk to a bank and low cost for the borrow. You open a CD and use it as collateral for a loan of the same amount. Usually $1,000 or more. A great way to build a good track record for loans.
• Secured Credit Card - These have also been around a while. They usually come with high fees so it pays to shop around. You deposit collateral money into an account and that amount is your credit limit. A great way to rebuild bad credit.
  
• Social Lending - This is relatively new and a bit more difficult. It can also be costly in terms of interest. You are borrowing from other people through sites such as prosper.com. Rates can be as high as 35% but is a good last resort option.

No matter which path you choose building or rebuilding credit is no easy task. It takes time, patience, money, and discipline. Evaluate your past mistakes if you have bad credit. Read blogs and columns online about mistakes to avoid of you are starting fresh with no credit. Our credit reflects on us as people whether we like it or not. Let's put our best foot forward!

American Express Cardmembers: Free Credit Report and Score!

Attention American Express card holders! AMEX is offering a free credit report and score from Experian if you are a current cardholder. I already got mine and I can confirm it is 100% free!

Go here to get your free report from American Express.

Part of everyone's spring cleaning should be to check up on your credit report and clean up and errors or problems sooner than later.

Is your report accurate?

Ways to start, build, or rebuild your credit history

For those starting out for the first time or having to rebuild credit due to extreme circumstances it can be tough to get that first creditor to start (or restart) your credit history. Their are a couple of options out there that can help. I will go over the best ones that I have found:

1. Secured Credit Cards: These are generally easy to get. You must put money, such as $500, as collateral on the card. Your credit line equals the amount you put down. Use the card and pay it on time build credit history. Beware of fees as some have very high start up costs. Good secured cards only have a small annual fee around $30-$40. Avoid all others.
2. CD-backed Loans: Credit unions offer these as a way to build credit. It is a fixed installment loan that uses a Certificate of Deposit (CD) as collateral. The term of the loans equals the term of the CD. The interest rate you pay is usually around 3% more than what the CD earns. This is a small price to pay to establish credit!
3. Having a co-signer: While this involves risk on the part of the person signing with you it is a good way to gain history. The best road to take is to get a fixed payment installment loan for $1000. This will limit the risk to the co-signer to the amount of the loan. As long as you pay on time you both get good credit! I would only do this if the above 2 options are not available or feasible.
4. Student Loans: It can be a little difficult to obtain without any credit but student loans in college do establish credit history. A lot of the time parents may have to co-sign but this is still an option. You get the advantage of lower, tax-deductible interest and the ability to defer payments during financial hardship. If you must borrow for college this is the best way and you get credit history as a bonus!

The above methods are the safest and easiest way to start or rebuild a credit history. They are the lowest cost options I could find that actually work. I found that most other methods were some sort of scam and / or they come with high fees. Stick to the basics and you can't go wrong!

Which debts should you pay off first?

I had this question myself and the answer is not always so simple. Some will tell you it is the one with the highest rate. Others will say it is the one with the lowest balance. Both of these methods are good but you also have to consider the type of debt that you have. It can affect your credit score and ability to get future credit (such as a mortgage) if you need it.

Barring some insanely high interest rate or high payment I have come up with a priority order of what debts should be attacked first. I will give me reasons for each as well. The order in which you pay them off can have big effects on your finances as well as credit report. Here is my list:

1. Credit Cards - Generally the highest interest rates plus rates and payment amounts can be adjusted at any time. Choosing the highest rate or lowest balance doesn't matter as much. These must be paid first in almost all cases!
   
2. Unsecured personal loans - These are installment, fixed payment loans. Example: You borrowed $2,000 paid over 2 years from a bank for a laptop. Interest rates are usually higher on these.
   
3. Auto and motorcycle loans - These loans are for depreciating assets and should be paid off next. Accelerating payment of these reduces the risk of having an accident where the car is rendered useless and you still have to pay the loan back.
   
4. Student loans - Interest is generally lower on student loans than the above debts and the interest you pay is tax deductible. In a real emergency you can defer payments if needed.
   
5. Mortgage and equity loans - These are usually the largest of all loans we carry and will take the longest to pay off. You have assets to back up this loan so it should be paid last. The interest on these loans is also tax deductible. Interest rates as usually lower than the above types as well.

Following the order above will ensure that you pay your debts off faster and in the correct order so that your credit rating will improve over time. Lenders like to see installment loans more so than revolving (credit cards) with balances when they decide to lend to you. You pay off your most expensive debts first using this method as well. You will be on the road to success!

I am currently working on steps 1 and 2 simultaneously. I am slowly digging out of my hole and soon will be able to accelerate my payments in the other areas. I recently paid off my smallest personal loan and can move to the next. It feels great to have one paid off!

Building Credit? Use a CD Secured Loan!

I found a great tool for building up your credit history and score. Some banks and credit unions offer a loan where you put money, say $1,000, into a CD. The term of the CD matches the term of the loan and the loan is secured with that CD. You make payments (on time, obviously) and they report the good credit activity to the credit bureaus.

The best deal I found is that a local credit union will charge you 3% above the interest rate on the CD. This is not a bad deal for building credit. You simply make the payments on time and you get the money back from your CD plus interest. 3% of a loan for $1000 for 1 year is $30. You are essentially paying them to give you a good credit history.

This is a great way to start to build credit history if you have none or to rebuild credit history after a rough patch. I personally suggest doing it one loan at a time with different institutions so you will have multiple on file. You can go back to these lenders later since you have a history with them if you need an actual loan that is not secured.

This is a better solution that credit cards since it is an installment loan. Credit cards are also good for providing history but they can be more difficult to get for some people. The lender has nothing to lose since it is secured with real money. It is a win-win for both parties.

Check your credit and check it often!

I recently had an experience with American Express that stresses the important of checking your credit report 1 time per year (free once per year for all 3 bureaus at annualcreditreport.com) and make sure everything is in order. I will use my true life story to make the point:

American Express recently started slashing people's credit lines in order to reduce risk. This makes sense as defaults are up, the economy is down, and unemployment is at near depression levels. Personally, my credit lines were slashed too low and I need a higher limit for work related business expenses. What a pain!

To make a long story short American Express claimed they saw a serious delinquency on my credit report. Turns out that a dispute with another creditor of mine that they cashed the check for my payment but did not post it drug on for nearly 4 months. On paper, my account was VERY past due. AMEX saw this and dropped my limits.

After getting transferred around and many mixed answers I was told to fax them a copy of my Trans Union credit report. I had pulled my report and saved it back in April of this year and they said that would be fine. I immediately faxed it over.

Today when I logged into my accounts and I notice that my spending limits were back up to reasonable levels. I am happy to have this sorted out and back to normal. It took 2 weeks of fighting with them over the phone to get to this point.

The moral of the story: Be SURE that everything on your credit report is 100% accurate. If I had not caught this issue I could have been denied credit for other things such as an auto loan, another credit card, or even a mortgage. It is free and takes only minutes so their is no reason not to do it.

A lot of people who have not checked their credit in a while see some unpaid utility bill or other small item that puts a big dent in their credit score. This can cost you potentially thousands in interest rates and other fees due to your "higher risk" as a borrower. A little time now can save a lot of headache, money, and paperwork later.

Checking your credit report annually also helps prevent and stop identity theft. If someone opens accounts under your name you will no as they will not look familiar to you on your report. The sooner you catch it the sooner you can start getting it corrected so you can get you financial life back to normal. This is another reason to SHRED or BURN EVERYTHING.

Be sure to give your credit an annual checkup. I do mine in the spring as part of my financial "spring cleaning" where I check my credit, re-evaluate my portfolio asset allocation, and adjust any long term goals as needed. Taking this simple step will make your financial life a lot easier in the long run!