Establishing New Credit

Zach Silverman | August 2, 2023

Building credit is a crucial step on your journey to financial empowerment. A solid credit history and your credit score plays a significant role in your financial life.

A good credit score demonstrates responsible financial behavior and can lead to lower interest rates on loans, higher credit limits, and better financial opportunities. Conversely, a poor credit score can hinder your ability to borrow or result in higher interest rates, costing you more money over time.

Establishing new credit is a bit of a catch-22. To build a credit history, you fist need credit. But it’s hard to get credit without having a credit history. So, where do you start?

Building credit is a gradual process that requires discipline and responsible financial management. By starting small, making on-time payments, and being mindful of your credit utilization, you can lay a solid foundation for a strong credit history. Remember that building good credit opens doors to financial opportunities, allowing you to achieve your goals and live a more financially empowered life.

Steps to Build Credit

Start with a Credit Card: If you're new to credit, consider applying for a secured credit card. With a secured card, you provide a cash deposit as collateral, which becomes your credit limit. Use the card responsibly, making small purchases and paying the balance in full each month.
Pay Bills on Time: Consistently paying bills on time, such as rent, utilities, and student loans, reflects positively on your credit history. Late payments can significantly impact your credit score, so set up reminders or automatic payments to avoid missing due dates.
Maintain Low Credit Utilization: Credit utilization refers to the percentage of your available credit you're using. Aim to keep your credit utilization below 30% to show that you're not overly reliant on credit.
Diversify Your Credit Mix: Having a mix of credit types, such as credit cards, installment loans, or a mortgage, can improve your credit score. However, only take on credit that you can manage responsibly.
Check Your Credit Report: Regularly review your credit report for errors or discrepancies. You're entitled to a free credit report from each of the major credit bureaus (Equifax and TransUnion) once a year.
Limit New Credit Applications: Each credit application results in a 'hard' inquiry, which can temporarily lower your credit score. Apply for new credit only when necessary.

If you’re looking to secure mortgage financing, Silverman Mortgage recommends you have a minimum of two trade lines (credit cards, loans, or lines of credit) with a minimum limit of $2500, reporting for at least two years.

If you don’t have any credit yet, the best time to get started is right now. However, that may be difficult because, as we've already identified, without a credit history, most lenders won’t feel confident about taking a chance on you. What’s the solution? Consider a secured credit card.

With a secured credit card, you make a deposit upfront that matches the amount you want to borrow. A reasonable amount would be $1000 deposited on a single secured credit card. You then use your secured credit card to make household purchases and regular utility payments, paying off the total balance each month. If you default on the money borrowed for whatever reason, the lender will retain the money you put up as collateral.

When looking for a secured credit card, be sure to ask whether they report to the two nationwide credit bureaus, Equifax and TransUnion. If the credit card company doesn't report, the credit card account will be useless for your purposes; move on until you find a company that reports to both credit bureaus.

Once your secured credit card begins reporting to the credit bureaus, you begin to have a credit score; usually, this takes about three months. Now you can start to seek out a second trade line in the form of an unsecured credit card. Don’t forget to ensure that this card reports to both of the credit reporting agencies. Another option at this point could be a car loan. From here, you simply want to make all your payments on time!

But what happens if you’re looking to secure mortgage financing before you have a fully established credit report?

Well, if you have someone who would consider co-signing, you can certainly go that route. The mortgage application will depend on their income and credit report, but your name will be on the mortgage. Hopefully, when the mortgage is up for renewal, you’ll have the established credit required to remove them from the mortgage and qualify on your own.

Although establishing credit takes a minimum of two years, it really begins with putting together a plan. If you’d like to discuss anything credit or mortgage-related, please get in touch with our team here at Silverman Mortgage Group!

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