Best way to build credit?

[Jester]

I've touched in finances in here before, but here's the story in the quickest way possible.

I used to have bad credit. Now I find myself with no credit.

I have two credit cards, but in actuality, they are debit cards tied directly to my two bank accounts, and are not true credit cards.

I recently acquired, through my bank, a secured credit card. I can use it to make purchases as I see fit, and my limit is the amount of money I have in the account I set up with my bank that is tied to it.

My plan is to pay it off completely every month. Which I can do very easily online with just a few keystrokes, as all of these accounts are with the same bank. My bank has advised me that in about a year, I can reapply for a real, unsecured credit card, and my history with the secured credit card should go a long way towards that. So I won't be letting the balance ride or paying the minimum amount, and racking up X% in fees! but as I said, paying it off every month.

My question is, what is the best way to build my credit? A few small purchases each month? Larger purchases? Keep in mind, I will not be buying anything with the secured credit card that I don't have the money for already in my other accounts. I will not overextend, or buy anything I can't pay off immediately. But I could still use any and all advice here.

For those wondering, I am not trying to build up my credit to buy a house. I have zero interest in home ownership, not just because homes here are ridiculously expensive and I don't plan on staying here, but even once I am back in Arizona, I am just too mobile a guy to ever consider buying a house. And I also like the idea that if something goes wrong with my rental, I just call the landlord/property manager, and THEY fix it.

But I would like to be a "real adult" again, and have a real credit card handy if I ever have any sudden situations or emergencies that I need to address. So I have started down the slow road towards that goal. I just need advice on the best way to do it.

I thank you now for any and all advice on this matter.

[NecessaryCatharsis]

To build up a credit card limit, it is not the best thing to pay off the balance every month, but to pay MOST of the balance every month. If you pay the balance in full every month it doesn't make the credit card company any money (they can't charge you interest), but if you leave a large balance it makes them wary to increase your credit limit in case you won't be able to pay it. Paying the balance to 2$ every month is the best way to quickly increase your credit card limit. So if your bill for the month is $365.26, pay off $364.00. Do this every month and in a few years the credit card company will have increased your limit to thousands of dollars.

As far as getting credit some loans are easier to obtain than others. In Canada we have RRSP, which is retirement savings that are (to some extent) exempt from taxes. These can be held by a variety of places, including banks. Because the bank can hold the money it is fairly easy to get a loan for one, since the bank never risks losing the money if you default, they just take it back out of your RRSP. I don't know what they would be called, but I'm sure there are similar types of investments in the states that you could get a loan for more easily than getting a line of credit, auto, business or house loan. Once you get and pay off a few of these, (always on time, never leave a balance on an actual loan) your credit score has increased so that you can qualify for other types of loans.

I'm in the middle of a 6 year plan (2 years to go) to qualify for a mortgage, starting from having zero credit in any way. These are the starting tips I got from a mortgage advisor. I currently have two credit cards, both of them started with a $500 limit, and I had to put $500 on one of them. My current credit card limit is about 47% of my annual gross income. As well I have had 4 RRSP loans. The one I am currently paying off is a three year loan for 75% of my gross income. So he did get me from 0 to really good credit rating quickly.

[mathnerd]

There are some pretty weird ratios that go into determining a person's FICO scores. It's not just having an amount of credit and paying it off every month, though that's a huge part of it. Here are some of the things to go into the determination:

-Debt to income ratio: How much debt do you have vs. how much you make. This one is pretty straight forward for the most part. One thing that most consumers don't realize is that it's not just the actual debt you have, but you potential debt as well. If a bank is evaluating you for a new car loan, they want to know that you're not currently tapped out, but also that you could still manage the new payments if you suddenly maxed out all your other credit lines.
-Debt to service ratio: How much debt do you have vs. how much available credit you have. Oddly, if you have $400 in credit card debt but only have $500 worth of credit lines, your score is going to be lower than if you have $1000 of credit card debt and $2000 worth of available credit. Whatever your available credit is now, it would be wise to spend up to about a third of it, and then pay most of it down every month.
-Your ability to manage an ongoing debt: NC is quite correct in that they want to see you manage a revolving balance and not pay it off every month.
-The age of your credit lines: You are a higher risk if your credit lines are newer. There's not much you can do about this one except get a line and keep it open.
-Your ability to manage multiple lines. Again, not much but time can solve this one.
-Unsecured debt can improve (or trash) your credit score much faster than secured debt. Get that secured card graduated to an unsecured card as soon as you're able to.

Random tidbit:

If you think your FICO score has improved, call your car insurance company and ask to be reevaluated. Sometimes an improvement in your credit rating can cut your insurance premiums.

[BlaqueKatt]

I rebuilt mine with capitol one "credit steps" card, specifically for that purpose.

the initial limit is $300, make the first x number of payments on time(mine x=2) increase to $500, Make the next 12 on time, increase to $1000, next 12, $2000, next 12(where I'm currently at at any increase point you can request it stay where it is, I'm going to stay at $3000, as it is almost strictly for emergencies, though I do keep a small balance.

As was said, if the CC company isn't making money off you, they do things like: change your due date, lower your limit, etc. because to them your like a customer that spends $1000s of dollars in a store only to return everything the next day(in effect that is EXACTLY what you're doing to them), so they want to either get rid of you or make something off you(late fees, over the limit)because in their eyes you are a very bad customer.

[Jester]

I am not looking to increase my credit card limit at this time, as this is a secured credit card. My limit is however much I invest in the secured line. Basically, I can increase my limit whenever I want. That's not the point at the moment. The point is to graduate to an unsecured credit card by building up my credit as much as possible with this secured card. At that point, I will worry about increasing my limit by doing what y'all have suggested regarding paying it not quite off. But for the moment, I believe (and someone correct me if I'm wrong) that making sure the secured card is paid off every month is a good thing towards building credit. As I am merely trying to build credit and improve my credit score, whatever that is.

And for reasons I'm not gonna go into here, Capitol One will not be an option available to me when I go for an unsecured (i.e., "real") credit card.

[mathnerd]

Showing you can manage revolving debt is a critical factor in you FICO score. This is why we're suggesting you not quite pay it off every month. Paying it off completely every month is good, but not great, when it comes to increasing FICO quickly.

For the record, my first position within MajorBank, before I transferred over to deposit operations was in loans and lines. While I wasn't an underwriter, I did work closely with them, and a huge part of my job required me to understand what goes into this. While it seems counter intuitive, the best way to increase your credit score is to actually be in a small amount of debt.

[NecessaryCatharsis]

My secured card started with a limit of $500 and a deposit of $500. After 30 months of paying most of the balance I had gotten 4 automatic credit increases (without paying additional deposits) and limit was $2500. I then called and asked if I could qualify for an unsecured card with a limit of $2000. They checked my purchase and payment history and said I qualified for an unsecured card with a $3000. Cool.

This was a MasterCard, so they are really in the business of unsecured credit cards, the cards with a deposit are a more recent add on. If your credit card company is primarily in the business of secured cards they probably won't be doing that, but if it is a more traditional credit card company they should be interested in getting you an unsecured card. Have you tried calling them to ask them about requirements to get switched, they may have a check list of requirements you can work towards meeting? (Purchase history, payment history, any other credit factors - utilities, loans, 36 months to pay off your couch or whatever).

[mathnerd]

Oh, and for the record, it is possible to be denied for a secured credit card. I've had to explain that one a few times.

[Firecrackers Not Included]

I can back what these guys have been saying. (if that means anything to you)
Seriously: Whatever you invested to make that "credit limit" you have, spend UP to a third of it
each month and pay it MOSTLY down each month. Whatever you don't pay off is part of next
month's third, so it's not going to get out of control or anything. Your credit score will climb
continuously from here on out. Some bank will send you an offer for another card in like 9-12
months.

[Jester]

Thanks for all the good advice, kids! Feel free to keep it coming.

If your credit card company is primarily in the business of secured cards they probably won't be doing that, but if it is a more traditional credit card company they should be interested in getting you an unsecured card. Have you tried calling them to ask them about requirements to get switched, they may have a check list of requirements you can work towards meeting?

Called? No. I've actually eat down with them to discuss it. It's my bank.

I'd previously applied for a regular credit card from them, and others, and been denied. It was my bank that suggested the secured credit card route.

Oh, and for the record, it is possible to be denied for a secured credit card. I've had to explain that one a few times.

I don't doubt it. People are idiots.

[Mel]

I recently inquired my bank about getting one of those secured credit cards for exactly the same reason you did. While looking into my finances, my bank advisor informed me that I was actually being approved for a 500$ limit (real) credit card. Why? Well, in June 2013 I bought an iPhone (as in paid full price for it, not accept it for free on a contract) and set up a monthly plan for it with Koodo (I think they are only in Canada, but not sure). I've paid my bill on time each month since, and they are the ones that reported positively to my credit rating system.

So, this time last year, I would not have been approved for credit, but the simple act of buying and maintaining a cell phone bill meant that I can start building my credit.

I'm still waiting for my new card to be mailed to me, and when it arrives, I plan to pay all my normal bills with it and pay it off (mostly) each month.

[wolfie]

Oh, and for the record, it is possible to be denied for a secured credit card. I've had to explain that one a few times.

Just curious, but what could get someone denied for a SECURED credit card?

[mathnerd]

Seriously bad credit will get you denied, but the most common reason is a recent secured line in which the bank had to reposes the securing account to pay off and close a line. Also, any record of a bank exercising "right to set off"* against any of your deposit accounts will also get you denied, in addition to any demand deposit accounts being charged off.

*In the US, banks have the "right to set off" bad debt by raiding any checking, savings or CD accounts you have within that bank in order to partially or fully pay off that debt. Word of advise: if you have a bad debt (credit card, loan, charged of DDA, etc) move any liquid funds to a different bank.

[mjr]

Why build credit? Don't know if you've heard of a guy named Dave Ramsey or not, but he suggests actually getting out of debt, staying out of debt, and NOT using credit.

MOST of the stuff you're going to buy, you can buy outright with cash. I don't think I've purchased ANYTHING on credit in a good 5 years or more.

[MoonCat]

Why build credit? Don't know if you've heard of a guy named Dave Ramsey or not, but he suggests actually getting out of debt, staying out of debt, and NOT using credit.

MOST of the stuff you're going to buy, you can buy outright with cash. I don't think I've purchased ANYTHING on credit in a good 5 years or more.

Well, I'm no financial expert, but I can tell you one reason: If you ever want to buy a house (not everyone does), you will need good credit even if you're using a special housing agency like NACA. No one is going to give you a mortgage if you have no credit, or bad credit. And most people can't pay cash outright for a house. I have an aunt who did, but the woman worked for 30+ years and banked most of her income. Most people can't do that.

This is true for cars as well, if you want to buy a new one or a really good used one. If you can put away enough cash to do this, well and good.

As you said "MOST" of the stuff you buy can be bought with cash. All it is takes is....enough cash.