Have you ever felt like you have to have money to have a good credit score but you can only have a good credit score if you have money? This guest post by Sa El, co-founder of CreditKnocks.com, can help you navigate the line between earning good credit and having it.
According to a white paper by the Yale Journal of Law, the age-old problem of the haves and have nots is a very common complaint made when people discuss credit scores and financial freedom.
But here’s the thing. There are multiple credit building tools available that can significantly increase your credit score for free or at very low cost.
We are going to discuss three ways that you can improve your credit score cheaply through the “borrow-a-kidney method”, by getting easy Fingerhut credit, and the aptly-named credit builder loan.
“Borrowing” A Kidney
I’ll admit it, borrowing a kidney isn’t going to help your credit score. In fact, I’m not so sure the practice of “borrowing” vital organs is in the best interest of anyone. However, you can borrow someone else’s credit card history if they add you to their account as an authorized user for absolutely free.
Essentially, you “borrow” (did I mention for free?) their credit history in the same way you may tell your father you are going to “borrow” the donut sitting in front of him… you have no intention of ever giving it back!
Being added to a credit card as an authorized user will result in the bank reporting the card’s credit history to your credit file which was detailed in a 2010 Federal Reserve paper entitled, ‘”Piggybacking Credit”. For people with a thin credit file due to no credit or limited credit, they can quickly add payment history, establish a longer credit history and increase their utilization ratio. There are many documented cases of 100+ credit score improvements by people with limited credit who were added to an older, high-limit credit card.
Of course, you do want to be sure that the person who is adding you to their credit card has a perfect payment history and the means to continue paying their credit card on time. If not, you will “inherit” bad credit history that will hurt your credit score, not improve it.
If you do not have access to someone who is willing to add you as an authorized user or does not have a good payment history, you can purchase an authorized user tradeline. There are companies that broker the sale of authorized user tradelines between people that have credit cards with perfect payment histories and people that need them.
Check with your parents, family or close friends and see if one of them would be a good fit to lend you a kidney, I mean add you as an authorized user.
Credit With Fingerhut Is Easy Peasy
Look, for years people have gotten their first taste of credit online from Fingerhut. The Fingerhut store catalog is nearly as famous for loose credit terms, as the Sears & Roebuck Catalog was 100 years ago. Fingerhut offers credit to be used at their online store to purchase anything from clothes, furniture, shoes, electronics, and jewelry, to name a few. You apply online and receive instant approval which can be anywhere from $50 to $5,000.
Even if you don’t qualify for their standard credit program, they offer a FreshStart installment loan for people with really low credit scores. All you have to do is select a few items from their online catalog and put $50 down. You can make minimum monthly installment payments from that point moving forward. Once you’ve completed these payments they will convert your account into a traditional credit account.
After making three monthly payments on time with their standard credit account, you will receive an automatic credit limit increase. As you continue to make your payments on time, Fingerhut will continue to increase your credit limit.
Your payment history, credit limit and utilization ratio make up as much as 65% of your FICO credit score which is why having Fingerhut Catalog Credit is so effective.
Credit Builder Loans Are Score Exploders (in a good way)
These are really neat loans that do a lot of good things to your credit file and at the end of the loan, you get a big fat check. Credit Builder Loans have been offered by local banks and credit unions for a number of years.
Here’s how they work…
They are different than a traditional loan because you make the monthly payments first and do not receive the loan amount until you’ve made all of the payments. The lender reports your monthly loan payments to the three major credit bureaus and it is considered an installment loan because it is the loan payment amount is fixed.
Having an installment loan added to your credit mix will help to thicken that file and improve your credit score.
The problem with credit builder loans used to be that it was difficult to find a bank or credit union that offered them. However, recently, a company called Self Lender started offering credit builder loans online to all 50 states. You can choose from a variety of loan amounts and payment options but the most popular one is the $525 loan over 24 months with a small monthly payment of $25.
There are no credit checks for a credit builder loan, so long as you have not had any problems with ChexSystems in the previous 6 months, you will be instantly approved. The lender will report your monthly payments to the big three credit agencies, so be sure to make them on time.
An economic think tank, Self-Help.org commissioned a study to determine the effects of credit builder loans on the recipients. They found that on average, a consumer who made all of the payments on time for the duration of the credit builder loan received a 68 point credit score increase.
There are a lot of free and cheap opportunities to build your credit score.
All three of these credit building tools can be started and finished in less than 5 minutes. But these aren’t the only ways to raise your credit score.
Two other popular tools you can look into are reporting your rent to the credit agencies and purchasing a secured credit card.
I know all of these credit tools work because one of my Credit Knocks business partners is blogging about his credit journey. He has improved his credit score from the high 400’s to the mid 600’s in just a couple of months.
If you take anything away from this article, the most importing thing is to remember to make all of your payments on time because they account for 35% of your FICO credit score. Building a strong credit history takes time and patience but don’t forget to use these inexpensive short cuts to a better credit score.
Sa El is the Co-Founder of Credit Knocks where he writes about credit education. He is also a Licensed Insurance Agent with over 11 years of experience and a licensed Real Estate Agent.
For more Living on the Cheap articles:
Everything you want to know about credit cards
Are balance transfers a good deal?
When to use credit cards and when to use debit cards
How to get a free credit report every year
Unexpected ways your credit score is used