Credit Sesame’s on ways to build credit and create good credit habits.
Start by remembering that even if you feel hopeless and helpless about your low credit score, you can become highly creditworthy. The process takes time and effort, despite ads you might see from scammers promising instant results. You have to be patient and determined to succeed. But that is pretty much the only qualification you need.
This guide outlines ways to build credit and develop good financial habits to keep a high score high.
Reasons your credit score is low
There is usually one of three reasons why people find their credit score is lower than they would like. These are:
- Having a “thin file.” They have not borrowed enough in recent years for lenders to know whether they are responsible borrowers. This is often a problem for the very young, who have never borrowed previously, or older people who have avoided borrowing as retirement approached
- Damaging a previously better score. Perhaps they went through a period of sickness or unemployment or reduced earnings that stressed their finances to the point they could not keep up with debt payments
- Never having had a good score. Some people are naturally bad money managers. It is not necessarily their fault because their brains may be wired differently from those who manage their personal finances well. Of course, this does not have to mean they cannot develop better habits
In all those situations, a low credit score today is no bar to a much better one in the future. Indeed, you might find it easier to raise a low score than a high one, simply because you have more levers to pull (more ways to build credit) than someone who already has excellent credit. Or, as credit-score technology company FICO puts it: “In general, the higher starting score, the longer it takes for the score to fully recover [from a hit].”
Ways to build credit
In 2020, Forbes magazine said:
It pays to have good credit. In fact, bumping your score from the “fair” range to the “very good” range could save you a whopping $41,000 on your mortgage (and thousands on student, car and personal loans, too).
And those are not the only savings. In some states, people with high scores can save $1,000+ yearly on their homeowners’ and auto insurance. Meanwhile, landlords often approve or deny tenants — and set their security deposits — based on credit scores.
Over your lifetime, a high score could save you tens of thousands of dollars, perhaps even hundreds of thousands. Read on to discover several proven ways to build credit.
Secured credit cards
Those with low credit scores generally find it hard to get approved for any sort of borrowing, including a mainstream credit card. This can put them in a Catch-22 position: They cannot get credit with a low score, and they cannot improve their score without credit.
A popular way out of this trap is a secured credit card. These are among the best ways to build credit from a low starting point and are available to almost everyone. That is because you are not borrowing any money. Instead, you deposit your own money and use the card for spending. So, in some ways, you can think of these as prepaid cards.
However, there are important differences between secured cards and prepaid ones. First, your card issuer reports your behavior as you manage your account to credit bureaus as if it were an ordinary credit card. That allows you to build your credit score — providing you do everything right.
And, secondly, you have to keep up with minimum monthly payments. Your “lender” will not touch your deposit unless you default. So, you must reduce or zero your balance each month as you would with a normal credit card.
Using a secured credit card
Doing everything right with a secured card mainly involves four things:
- Funding the card regularly — You may wish to pay early because you never, ever want to be late
- Keeping your balance low as a proportion of your “credit limit” (the amount you deposited) — If you want to build your score quickly, keep that balance below 10% of your limit. But, if you are in less of a hurry, keep it below 30%
- Making at least the minimum payment — Again, if you want fast results, zero your balance each month
- Not initially applying for more than one secured credit card — Live with one for several months before thinking of applying for a second
If you follow those rules for maybe six months, you may find that your score is rising. But it is likely to take longer to reach a point where mainstream lenders begin to welcome you. Still, eventually, you could trade in your secured card for a normal one.
Just beware of one thing. There are some bad players with rip-off fees in the secured cards market. So check online with sources like Trustpilot and the Better Business Bureau before you sign up. And be sure to read the small print in the contract before agreeing to anything.
Sesame Cash secured credit card
Of course, Credit Sesame is famous for providing ways to build credit. And we believe our Sesame Cash secured card, combined with our Credit Builder service, gives unbeatable help to those who want to build their scores. But, as with all financial products, you should comparison shop before you commit.
Sesame Cash offers online banking with effectively no fees:
- Just two fees — $2.50 when you make an out-of-network ATM withdrawal and the same for an international ATM withdrawal. Seriously, that is it! Read the card’s fee schedule on its terms and conditions webpage
- Government (FDIC) insurance on your deposits
- Highly functional Mastercard®
- Cashback rewards
- Free mobile device protection
- Two-day early payday
Visit the website for answers to your questions.
A credit-builder product should do what its name implies. It is a tool that helps you build your credit score.
Credit builder loans
Some companies offer secured “loans,” which they describe as “credit builder loans.” Here is how federal regulator the Consumer Financial Protection Bureau (CFPB) describes these:
“Financial institutions, typically credit unions, deposit a small “loan” (often $300-$1000) into a locked savings account, and then you pay the
institution back with small-dollar payments over 6 to 24 months. These payments are reported to the credit reporting companies. Once you come to the end of the loan term, you receive the accumulated money back in total.”
Sesame Cash Credit Builder
Some other companies offer a more fully featured credit builder service. Take Credit Sesame’s offering:
- No credit checks
- Shop with debit to build credit — Your debit account monthly payments are reported to the Big 3 credit bureaus as if they were made on a credit card
- Daily access to your credit score
- Cash rewards when you pass credit score milestones
- Cashback on many purchases
- No fees — Except for international and out-of-network cash withdrawals. Third-party and cash deposit fees may apply.
- Seamless integration with the Sesame Cash card
- Get recommendations of cards and loans for which you’re likely to be approved
Of course, we think that is an unbeatable offering. But we would say that, wouldn’t we? Once again, always shop around for your best deal before committing to a new financial product.
Use a co-signer for new loans or credit products
Many lenders who would deny an application from an uncreditworthy borrower are willing to approve the loan if a co-signer comes onboard. That allows you to have an account in your name and so can be one of the most effective ways to build credit.
A co-signer is someone with good credit who signs an agreement to guarantee your debt. Nothing is likely to go wrong for the lender, who now has two people to chase — including one creditworthy one who may have plenty of financial resources — if your loan goes bad.
But plenty can go wrong for the co-signer if you make late payments, default or skip town. That is because any bad behavior on your part will appear on their credit report as well as yours — and potentially drag down their score.
Perhaps worse, the lender can demand full payment of the debt if you default. And it is likely to target the co-signer — who probably has savings — before you when it comes to collect. On a large loan — perhaps a mortgage or car or student loan — that could have serious consequences.
All this means any person who agrees to co-sign your loan will have to love you a lot. And, if you love them back, you shouldn’t ask unless you’re confident you can manage that loan perfectly.
Become an authorized user on a credit account
Some credit accounts, and especially those for credit cards, allow the cardholder to add an authorized user. This can be another of the more effective ways to build credit. Better yet, it reduces the risks to your friend or family member compared to being a co-signer.
It does not eliminate those risks entirely. Because you typically get a card in your name on someone else’s account. That means the person who is helping you has to trust you not to go rogue and run up huge charges that you cannot repay. However, nowadays, almost everyone can monitor their accounts online, so your friend or relation could quickly cancel your card, should the need arise.
According to card issuer Capital One, ” … credit card companies aren’t required to report authorized users’ activity to the three major credit bureaus.” So, you have to make sure that the one you’re going to use does make those reports. Otherwise, the whole credit-building exercise will fail.
Capital One continues: “But if the card issuer reports information, seeing positive effects on the authorized user’s credit starts with both the account holder and the authorized user using the credit card responsibly.”
Unfortunately, not all credit card companies allow authorized users at all. So, ask the person who is helping you to call his or her card issuer to make sure you can become an authorized user, and that your credit will benefit if you both decide to go ahead.
Make sure bills are in your name
Traditionally, credit bureaus (aka credit reporting agencies) only tracked your credit accounts. Therefore, payments on things like rent and utilities did not appear on your credit report, and so did not affect your credit score.
However, that has been changing in recent years. VantageScore, alongside FICO, is one of the two biggest builders of credit scoring technologies. And it explains:
There is a trend evolving which gives consumers some control over the credit reporting of nontraditional credit accounts. For example, Experian Boost is available to help you add your utility and mobile phone accounts to your Experian credit report. This is an example of what’s being called consumer controlled or permissioned data. You choose and control whether or not it’s added, and for how long it’s reported.
Many landlords are willing to report rent payments, too, upon request. For many people with scores below 675 or 700, this can be among the quickest and easiest ways to build credit. And it’s free. The person who wrote that VantageScore article reported, “I personally tried Experian Boost. I added my power and gas utilities to my Experian credit report. My score went up 5 points. It cost me a grand total of zero dollars. I’ll take it!”
Of course, such quick hits are just a start. And months and years of on-time payments on rent and utilities should continue to improve your credit score. But only if the accounts are in your name.
However, this is potentially a double-edged sword. Your score should climb nicely as long as you continue to make full and timely payments. But it should fall every time you are late, skip a month or make a part payment. So, be sure you are able to manage these accounts well before you ask for them to be reported to credit bureaus.
Make building credit a habit
We have provided several ways to build credit. However, none of them will work in the long term unless you get into good credit-building habits.
In the long run, your credit score is determined by how responsibly you manage money. And that score is influenced most by the following behaviors (in order of importance):
- Pay all your bills on time. And make sure every payment is at least the minimum required that month
- Keep your credit card balances low. Do not let a card’s balance exceed 30% of its credit limit. If you are trying to improve your score, keep those balances below 10%
- Do not open or close credit accounts unnecessarily. It is OK to do so if you need to, but do not act on a whim
- Never make multiple credit applications for new accounts over a short period. It makes you look desperate and raises red flags (and your score)
- Monitor your credit report for errors. And keep an eye on your score to track your progress. Do not worry; using a credit score monitoring service does not affect your score. Only credit applications do
Everybody goes through bad patches. So, there may be times when you cannot follow all those rules as strictly as you would like. For example, you might have no choice but to skip a payment or run up your card balances if you fall sick, are unemployed for a while, or face reduced hours.
Maintain credit habits during good times and bad
Of course, it’s always wise to build an emergency fund during good times that can help tide you over during bad times. And setting up a household budget now could help you with that. However, many of us do not have the sorts of good times that leave spare money for saving.
Still, even then, there are ways you may be able to reduce the impact on your credit score of your unavoidable actions. Call your lenders early on in your difficulties, explain your position and ask if they can give you some leeway. While you’re calling, request that they do all they can to reduce the impact on your score of what is happening. They do not have to help you, but many will.
Sign up for Sesame Cash Credit Builder today
Of all the ways to build credit we have described, the Sesame Cash Credit Builder service is probably the most affordable (it is free), accessible and immediate.
And it is designed to help everyone: rich or poor, and those with high or low credit scores. Indeed, Credit Sesame does not check your score at all before approving you.
It is easy to sign up. Apply now if you are ready to take your first step to a better credit score.
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.