What’s the best way to build my credit from scratch, so I can start financing real estate?
Growing up, few of us are lucky enough to have a parent or teacher explain the importance of building credit. Then, when you decide to buy a real estate investment or sign-up for a credit card, you’re shocked when they turn you down because of insufficient credit history.
The reality is your buying power is heavily influenced by the amount of money you can borrow. An excellent credit score and history can literally make you millions of dollars. Lenders will approve you for higher limits and offer you the most competitive real estate financing.
But when you’re starting from nothing, it’s tough. In order to build your credit history, you need someone to approve you for credit, but without a credit history, no one will approve you. It’s a Catch-22!
Fortunately, there’s a way out. Take the following steps to build your credit from nothing to superstar status in a year or less:
1) Sign-Up for a Secured Credit Card with Your Local Bank
In the finance world, credit is a measure of your trustworthiness. Without it, you’re risky. If you want to start from nothing, you need to remove that risk. Many banks and credit card companies offer what’s called a Secured Credit Card, where you give them a few hundred dollars as security for the credit card. So, if you don’t pay it back, they keep your money.
On the other hand, if you’re a good customer, they’ll report a positive rating every month to the credit bureaus and eventually refund your deposit. You can apply for one of these cards with nearly any bank, but most people recommend the Bank Of America Secured Card. Sign up for it at your local branch.
2) Ask a Relative or Friend to Add You to Their Credit Card
Think through the people you know. Who seems to consistently pay their bills on time? Chances are, they have a good credit score. Ask them and your other friends and relatives to tell you their credit score and offer to connect them with a mortgage broker if they don’t know. You are looking for someone with a credit score of 700 or higher and at least three years of credit history.
Once you’ve found them, explain that you’re trying to build your credit but you need some credit history. You don’t want to use their credit cards, but you need your name added to a few of the cards they’ve had the longest with the lowest balances. If they agree, you’ll immediately see your credit score start improving. When creditors pull your file, they’ll also see a longer report for the cards your friend put you on. It’s instant credit history!
3) Apply for Another Credit Card Every Few Months
After accomplishing the above steps, wait a month or two for your credit to build. Then you can start applying for credit cards and accounts with retailers like Best Buy and Home Depot. Start with small limits. When you are approved, make some small purchases and pay them off immediately. Never miss a payment or allow the balances to add up.
Follow that strategy for a month or two and then apply for more credit cards. You’ll start receiving higher limits, better rates, and more offers. Accept the best ones until you’re up to at least six credit cards. Every once in awhile, make purchases on each of them, but keep your balances as close to zero as possible. You’ll see your credit score increase dramatically, eventually topping 800. And then you’ll qualify for the most competitive real estate financing available.