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Building or rebuilding a credit score seems like an impossible task. Young people starting out think they'll never qualify
for the best interest rates. Homeowners who may be facing foreclosure think their scores will never recover.
We asked readers what they wanted to know about FICO
scores, and we had many requests for guidance on building or rebuilding
them. We posed these questions to Fair Isaac product support manager
Barry Paperno, who has worked for the credit-score company since
1995.
A reader who hasn't used credit
cards in 15 years and has paid off the car and the mortgage
wants to know how to build a credit history again. Any suggestions?
A misconception is that it takes a lot of credit, or that you need
a long history or a lot of credit to establish credit, and that's
not true. You can get by with one account on your credit report,
because the minimum criteria are an account that's at least six
months old and one that has been reported to the credit bureau or
updated at the credit bureau within the last six months. It doesn't
even need to be active; it just needs to have been reported by whoever
issued that account. It can be the same account you've had for over
six months that gets reported every month -- then you have a credit
history with that account. Or, like in this person's case, let's
say that the mortgage that they paid off is still on the credit
report from 15 years ago. That would meet the requirement of being
on the report for six months. Then let's say he gets a new credit
card -- the first day that that gets reported to the bureau
and shows up on his credit report, he's got a FICO score.
| A FICO expert explains what it will take to build a credit score and how to repair a score after a foreclosure. |
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| 5 questions for Fair Isaac expert |
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That's basically what the score requires. In terms
of the strategy to go about doing that, there may be some pitfalls
to avoid and things to do to get the most bang for your buck. When
you're in the Catch-22 -- you don't have credit and before somebody's
going to issue credit they want to see some credit -- one thing
that people do is get a
secured card. Credit unions are good for that or a bank that
you've had a good relationship with for some time. You would use
it in the same way as you would a credit card, any bank card. It
would be a Visa or MasterCard, for example, but the lender would
require collateral from you, usually in the form of a deposit.
That deposit usually corresponds to the limit that
they're going to extend you. So, for example, if you'll put a $500
deposit down in their bank or credit union, they will give
you a $500 limit. You can run your balance up to that and you can
pay it every month just like you do a credit card, but of course
there's more security for the bank. If you default, they can just
take the money you have on deposit. The thing to make sure of
is that it functions like a credit card, and to make sure that it's going to be reported to
the credit bureaus as such. It doesn't do your score any good if
that's not reported to the credit bureaus. You want to make sure
that it's reported to all three credit bureaus, if possible.
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