Part of our process - A BIG part of our process - is to build credit. Remember, the credit report is a mix (usually) of both good and bad information. The bad information may be in the form of collection accounts; charge off account; late payments; public records such as bankruptcies, liens and judgments, among a host of seemingly innocuous information.
Now, hopefully, we also have some positive information reporting such as a few credit cards (low balances please), maybe a car loan or school loan. If that is the case, GREAT! If not, if we only have negative information, a critical step in increasing the scores is to 'Build Credit'. But... how do we do that? Walk into any bank and believe me, there will be plenty of folks that will be more than willing to sell you a loan stating 'it'll build credit!'; and it will. But... at what cost?
I just got off the phone with a client today as a matter of fact. His question, "Can I build credit with a loan?"
I said, "Yes," but what is the interest rate?
To me, it makes very little sense to buy a loan, which is in fact what we are doing when we 'take out a loan'. We are 'buying' money. But, how much are we spending for that money? If we are talking about a payday loan at 20%, please do not do this. Please.
Say for instance we take out a $1000.00 loan at a high interest rate. Does it really make sense to pay $100.00 a month in interest to build credit?
Um... no, it doesn't.
Ideally, we are in credit repair so that we don't have to pay high interest rates anymore. That's the whole point (one of them anyway) in working on your credit, whether you go through a credit repair organization or not.
So, my opinion? Depending on your credit; either a secured, or unsecured credit card.
What's the difference? Good question!
A secured card is exactly that. It is secured by a deposit of money. That money sits in a separate account. If you continue to pay the card regularly and are not late the money just sits there. Typically after a series of on-time payments, the creditor will elect to give the money back to you. Boom. The card becomes 'unsecured'. Congratulations, you are well on your way!!
Yes, the credit card has a higher interest rate. But if you pay the card off before the payment is due, you are paying interest for a shorter period of time. Additionally, we should only be charging 20% of our limits. So if we have a limit of $100.00, we should be charging about $20.00. Interest on $20.00 is minuscule.
Remember gang, we are building credit so the creditor will send positive data to the bureaus, which then offsets (to some degree) the negative information on your credit report. We are using the creditors!! Do we want to pay $100.00 a month in interest to have them send the data? Or do we want to pay a few cents? The result is the same; positive data to the bureaus.
If this doesn't make sense, call us. We'll fill in the gaps.
Ed-Jack Dvorak is National Affiliate Liaison at Credit Dr., a national credit restoration company. He works with clients and creditors to improve credit profiles.