You need to buy a car and finance it with a loan. But the bank turns you down, citing a lack of credit history. You decide to take a look at your credit score to learn more about your situation, but can’t figure out how. Friends say their credit cards give them access to their credit scores, but you don’t have any credit cards. If you did, you might not be in this situation.
This frustrating circle is a reality for the roughly one in five Boston residents who are “credit-constrained” – meaning their credit records are thin, outdated, or nonexistent – according to numbers from the Consumer Financial Protection Bureau. Nationwide, more than 30 million people fall into these categories.
So how can a consumer break the cycle?
The first step is to find out if there is a credit report on your financial history. At annualcreditreport.com, consumers can request a free copy of their report from each of the three major credit reporting agencies once every 12 months.
Next, start building credit. One option to consider is a secured credit card. They work much like regular credit cards, but require you to deposit money with the bank to back-up your credit line. The bank can then deduct money from your deposit if you don’t pay your bills.
Choose a card with no annual fees, and once you have an account, use it regularly but moderately. Charge $10 or $20 each month and pay it off in full each billing cycle. Over time, your credit score will climb.
Another option may be a credit-builder loan. These small loans — generally from under $500 up to $3,000— are offered by some credit unions and a few banks. Look for a credit-builder loan that deposits the sum you borrow directly into a savings account that you cannot access until the loan is paid off. The terms typically run from 12 to 24 months. The goal is to build up a modest nest egg while also demonstrating your credit-worthiness. Unlike a secured credit card, however, you will still owe interest, even when you pay what’s due each month.
Once you get your credit on firm footing, remember to check your credit report regularly and use your new credit responsibly if you want to continue reaping the benefits of all your hard work.