Question: My credit score is 658. I have no credit cards, mortgage, or other loans — although I’ve had all of those in the past. I work full-time for $30 per hour, get Social Security retirement, and have about $10,000 in a 401(k). I like to travel and expect to live another 20 years. I see all these credit cards with rewards travel points, but I never seem to qualify for any of them. Am I too old to tweak my credit score so that I can qualify? – Janet in California
Laura Adams, author, and host of Money Girl podcast responds…
Thanks for your question, Janet. The short answer is no, you’re never too old to improve your credit! There are no downsides to building better credit — only many upsides.
Even if you weren’t interested in qualifying for a credit card, having better credit could improve your financial life in many ways, including:
- Lower auto insurance rates. Insurance is regulated by states, so the rating rules vary depending on where you live. While no state allows credit to be the only factor in setting auto rates, most use it as a factor in determining how much you pay.
- Lower home insurance rates. Just like with auto insurance, insurers use credit when setting rates for home, condo, and renters’ policies. Again, no state allows credit to be the sole factor in setting home insurance rates.
- Approval to rent a home. Most landlords, property managers, and leasing companies check credit as part of the application process to make sure you’re likely to pay rent on time. If you have poor credit you may get turned down to lease or have to pay a larger security deposit.
- Less expensive utilities and cell phone contracts. Having poor credit means you might have to pay a hefty security deposit for utilities, such as water, gas, power, and cable. Cell phone companies also check credit when you apply for a new contract to make sure you’ll pay their bill. If you don’t have good credit you may be charged higher rates or not qualify for top-tier wireless plan offers.
This isn’t a complete list of all the ways credit affects your finances. The main point to remember is that when you build credit, not only do you become eligible for credit accounts, but you also save money and improve your financial life in other ways.
Is your credit rating holding you back? Find out how to fix it.
Common misconceptions about credit scores
A common misconception about credit is that if you have no debt, you must have good credit. That’s completely false. In order to have good credit, you must have active credit accounts and use them responsibly.
Unfortunately, having no credit is the same as having bad credit. A “thin” credit history means you don’t have enough data in your file to generate a credit score. Without a credit score, lenders and merchants have no way of evaluating how likely you are to repay your bills and are likely to deny you credit.
It can seem like a catch 22. You can’t build a credit history without a loan or credit card, but you can’t get one without having a good credit history! Fortunately, using a secured credit card the right way is an easy way to build credit. There are also credit builder loans that are specifically designed to help people with bad credit build their way to a better score.
What is a secured credit card?
A secured credit card is similar to a regular, unsecured credit card in many ways:
- They look the same.
- They can be used to make purchases at the same stores.
- They require a minimum monthly payment.
- They charge interest if you don’t pay off your balance in full by the statement due date.
- They may charge an annual fee.
- They may offer a variety of benefits, such as fraud coverage, price protection, extended warranty, or travel accident insurance.
The main difference between a regular and a secured card is that you must pay an upfront deposit because it reduces the issuer’s loss if you don’t pay your bill. The minimum required security deposit varies depending on the card you choose. Some issuers may only require $50, but others may ask for several hundred.
If you deposit $300 on a secured card, your total charges can never exceed that amount. However, if the card has an annual fee, it may be taken out of your deposit.
For instance, if you put up $300 and have a $50 fee, your credit limit becomes $250 for the first year, $200 for the second year, and so on.
How a secured credit card helps you build credit
The major benefit of a secured card is that some, but not all, cards report your payment data to one or more of the three nationwide credit bureaus: Experian, Equifax, and TransUnion.
But don’t spin your wheels with a secured card that doesn’t report your payment history to at least one of the bureaus. A history of making on-time payments — even if they’re just the minimum payments — helps you build credit quickly. After you use a secured card responsibly, the issuer may offer you a regular card.
Remember that you never need to carry credit card debt to improve your credit. It’s true that you must have credit accounts and use them to build credit. However, you can pay them off in full each month. That’s the best strategy to avoid paying credit card interest and build credit at the same time.
What is a credit building loan?
A credit building loan is another useful tool for building credit. It’s basically a self-loan that you make online through a company like Self Lender. It helps you build credit and gives you a useful way to increase your savings at the same time. You take out a loan and the funds are used to open a Certificate of Deposit (CD) that grows with interest over time.
Then, you make payments to pay the self-loan back. Companies like Self Lender report to the credit bureaus just like a traditional lender. So, you build positive credit history and receive your money back with interest added once the CD matures.
How a credit builder loan helps you build credit
Just like secured credit cards, credit builder loans are designed for people who need to build credit. So, you can qualify even if you have a bad credit score or no credit score because you’ve been living without debt.
As long as you make all the payments on the credit builder loan on time, you build a positive credit history. You also improve the mix of credit that you have if you have a secured credit card and a credit builder loan at the same time.