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I am trying to build up my credit, but I'm not sure how to. Currently, I only have 2 minor things on my report. Both are not necessary good. I owe $75 to a company(which I plan on paying now that I know about it) and I owed like $50 to a company which I paid(and the report indicates this). So, my score is in the low 500s.

The problem I'm having is I don't know how to build credit because until I looked into buying a car, I never needed it. I've always lived within my means and never had a loan or anything like that. So, now I'm having difficulty getting approved for a car loan with interest lower than 25%(!!!). I've tried applying for a few small store-specific credit cards, but I've not been approved for anything yet. What can I do to get over that initial bump so I can get a credit card and build credit in that manner?

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3 Answers 3

What you should be doing

You're going to have a huge problem getting approved for anything as long as you have an unpaid bill on your report. Pay it and make sure its reported as paid in full - ASAP.

Once that settled, your credit will start to improve slowly. Can't do anything about that, it will take time.

You can make the situation improve a bit faster by lending money to yourself and having it reported regularly on your report. How? Easy.

Get a secured credit card. What does it mean? You put X amount of money in a CD and the bank will issue you a credit card secured by that CD. Your credit line will be based on the amount in that CD, and you'll probably pay some fees to the bank for the service (~$20-50/year, shop around). You might get lucky and find a secured card without fees, if you look hard enough.

Secured cards are reported as revolving credit (just as any other credit card) and are easy to get because the bank doesn't take the risk - you do.

If you default on your payments - your CD goes to cover the debt, and the card gets cancelled. But make absolutely sure that you do not default. Charge between 10% and 30% of the credit limit each month, not more. Pay the balance shown on your credit card statement in full every month and by the due date shown on your monthly statement.

It will take a while, but you would typically start noticing the improvement within ~6-12 months.

What you shouldn't be doing

Stop applying for stuff. Not store cards, not car loans, you're not going to get anything, and will just keep dragging your scores down. Each time you have a pull on your report, the score goes down. A lot of pulls, frequent pulls - the score goes down a lot. Lenders can see when one is desperate, and no-one wants to lend money to desperate people.

Optimally lenders want to lend money to people who doesn't need loans, but in order to keep the business running they'll settle for slightly less - people who don't usually need loans, and pay the loans they do have on time. You fail on both, as you're desperate for a loan and you have unpaid bills on your report.

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+1 for a very nice answer. Suggested edits to emphasize the most important points about the credit card since the OP might be forgetful: " If you default on your .... canceled. But make absolutely sure that you do not default. Charge between 10% and 30% of the credit limit each month, not more. Pay the balance shown on your credit card statement in full every month and by the due date shown on your monthly statement. It will take a while...." –  Dilip Sarwate Jan 17 '13 at 12:57
    
+1 from me too, but I would caution that when getting a secured card, make sure it is being reported to the credit bureaus. Additionally, make sure the card has a plan for graduating to a non-secured card at some point. –  MrChrister Jan 17 '13 at 20:55
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+1 When I first moved from Australia to the US, I made the mistake of applying for a couple of cards here to replace the Australian cards I had. My Australian cards had a combined total credit limit of about USD 40,000 with nothing owing. However, because none of my credit history was in the US, it didn't count. I was knocked back on both initial applications... which impacted my credit score negatively. The crazy part was that I had (through my employer) already organized a mortgage at a good rate, but no one would give me a card. The first card I got had a USD 300 credit limit. :-) –  Peter K. Jan 17 '13 at 22:33
    
@DilipSarwate - My friends at Credit Karma show 1-19% is the idea utilization. Any reputable sources for the suggestion up to 30% is ok? –  JoeTaxpayer Jan 18 '13 at 17:41
    
@JoeTaxpayer The 10-30% figure is not mine, but was there already in littleadv's original posting. I merely added a few words and re-arranged some of his original wording to move the suggested amount to what appeared to be a more logical place. So, please ask littleadv for the source of the 10%-30% figure. –  Dilip Sarwate Jan 18 '13 at 18:56
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  1. Pay off the owed accounts immediately. Then, from a related topic:

What's the fastest way I can raise my credit score from nothing?

I worked at a bank for almost 6 years and used their secured credit card. To give you an example of what that did as far as credit was concerned: on Transunion my score increased 200+ points, while on Experian and Equifax, it increased by less than 150. Most customers who used the card also saw an increase, provided that they paid on time and didn't max out the card.

Some strategies I used and I recommended to my customers:

  • Watch the credit utilization ratio. This is the amount of credit you've used to the amount of credit available. If you set up a secured card with a $1000 credit line, watch how much of that limit you use. Typically, the lower your credit utilization is, the better (see: http://credit.about.com/od/creditreportscoring/a/creditutilization.htm).
  • ALWAYS. PAY. ON. TIME. With everything; I'm surprised by what I've seen on my credit report outside of credit.
  • Avoid reckless credit inquiries. This is hard because so many companies want to do a credit check, and the list seems to be increasing. I've also dealt with employers who wanted to do it. If someone says they need to (like an internet service), ask if there's another method (usually, there is).
  • Monitor your credit and when it reaches 600, try an unsecured account. It may not take a year.
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