Credit Education

Buying on credit requires a lender who judges you to be a good risk for credit. Today this means having a good credit score. Your credit score is based on your history of using credit.

No credit history, low credit score. Low credit score, no credit offered. No credit, no credit history. No credit history, low score…

Classic chicken-and-egg problem.

This article tells you how to solve this problem. And you don't have to be rich to do it. Just follow the instructions and be patient.

Here are the five steps to having a good credit score starting from scratch:

1) Get a bank account.

If you don't already have one, get one. You're looking to establish a financial relationship. If you have a local bank, use it – a bank you can walk in and get to know people. We like independent community banks because they are based on personal relationships. In Texas, there is the Independent Bankers Association of Texas. If there's one in your area, it's a great place to start. Local credit unions are good also.

2) Get a credit card.

Once you've established an account with a bank, see if they will issue you a credit card. They may require some time with them first. Or, they may offer a secured card – they keep the amount of your credit limit in reserve. It's like a deposit and called a secured credit card. Many banks do this and, after a year or so, they give your deposit back.

Important: Ask and make sure that your credit card, and other credit accounts report to all three bureaus. Just ask "does this card/installment loan report to all three bureaus."

3) Get an installment loan.

Credit cards are called revolving credit. That's one type of credit and you want more than one for a good score. A second type is installment. Examples of installment credit are auto loans and some appliance loans.  Avoid payday loans or anything that identifies as a "Consumer Finance Company." If you are not getting an installment loan from a bank or credit union, then it is likely a consumer finance company.

We recommend you ask your bank or credit union - the one you've established a relationship with – to give you a secured installment loan. This is similar to the secured credit card. They hang on to the amount of the loan, and you pay installments every month. Then you get your money back. Ask them what is the smallest amount for which they will do this.

The best installment loan when you are starting out is an Auto Loan as it gets you auto history. When you are buying a car, auto history is key to getting the best interest rate.  Even a 740 gets a higher rate when they have no auto history.  For the first auto loan, a co-signer with good auto history and high FICO Scores can make a huge difference in lowering the interest rate on that first auto loan.

4) Meet all your credit obligations perfectly.

Don't be late on any credit payment, do not miss any payments. This is absolutely mandatory. You do not want to be building bad credit history.

5) Wait.

Your credit file is young, right?  There is risk in youth. With age comes less risk, higher scores.  Wait 6-8 months and you will have a FICO Score, even at this point it will be over 620.  The longer you go, the better the scores.  Resist opening up new accounts as they will only lower your scores.

The higher your credit score, the better the credit terms, the lower the interest, the more you will save.