How Uber Drivers Can Build Credit with Credit Cards
The only way to build your credit is to get into debt. It sounds odd, but your credit is based on your history with loans. If you have a lot of loans but have a history of paying them off responsibility, then you will have good credit. If you don’t have any debt or loan in your history, then companies don’t know your credit worthiness, hence a low credit score. Just because a person has a low credit score doesn’t mean that they are bad with debts. It could be because they have a very short or limited credit history.
(Note, you can build your credit without getting into debt. You can use credit cards to pay for your purchases, then pay it off once the statement closes. Theoretically, you are in debt between the time the purchase is made and the end of the statement, but this is interest free, so you’re essentially borrowing money for free.)
Installment Loans
One type of debt most people get are student loans. These are considered installment loans and if you make your payments every month, it will increase your credit score over time. Typically, deferments don’t affect your credit history or score, but defaults and late payments do. Usually, there is very little choice in student loans, so it is best to take what you can or what you need and pay them off after you graduate. Make sure to make the required payments and you will see your credit score improve. In this particular case, payment history helps your credit score.
Another type of installment loan most people get are car loans. If you have little to no credit, it may be hard to get a car loan and even when you do, it may have very high interest rates (5-7% higher than “normal”), costing you potentially thousands of dollars over the life of the loan. One way to get a car loan for credit history purposes is to get a very cheap used car ($3-5k) on a payment plan and try to negotiate the interest rate down as much as you can. Make all your payments and this over time will build your credit. You can also take out the loan, pay a few months then pay the rest of the loan a few months later. This will save you hundreds if not thousands of dollars and help build your credit. You may not get the full benefit of a long payment history (longer history of making payments will look better on your credit score), but it will help to at least get it started so you can get a better loan down the road.
If you don’t have enough credit to get a car loan, the only other way is to get a credit card. Before using this outline on improving credit, read my other post on how Uber and Lyft drivers can improve their credit. This is a must if you have a low credit score but its not due to your limited credit history.
How Credit Cards Fit into the Mix
Here is the pie chart showing how your credit score is calculated:
Installment loans would most directly affect payment history. If you have a long history of paying off your bills on time, it will increase your credit score. It also contributes to length of credit history, but adversely affects amounts owed.
Credit cards usually provides you a line of credit, which will improve your “amounts owed” category. It will increase your credit-debt ratio. In the short term, it will lower your credit score by a 10-20 points because the new credit inquiry will lower your credit. Too many credit inquiries can lower your score by 40-80 points so make sure to limit hard credit inquiries. In the long term, the higher credit-debt ratio will increase your credit score.
Below is the general overview on how to build your credit with credit cards. This strategy requires you to spend a reasonable amount on the credit cards and paying it in FULL every month. I only use my credit card to pay for stuff during the month, then pay it off in full every month. I consider it like digital cash. You will need a certain amount of debt to show up on your monthly statements so that payments will register on your credit score.
Your Credit Card Strategy
Low credit score or limited credit history:
- Start with credit cards that are geared for low credit consumers:
- Student credit cards – only for students, may require a cosigner (parent), and often have high interest and low credit limits. If you are still a student, consider getting one of these, use it and pay it in full every month.
- Secured credit cards – these credit cards require a deposit and they hold it as collateral for how much you can spend. For some people, this is the only option. Often, these cards have annual fees so watch out for that.
- Start small: If this is your first credit card, it usually has high interest so be careful to pay off everything you put on your card. The worst kind of debt to have is credit card debt as interest rates are often near 20% a year. Don’t spend too much, but put some purchases on it and make sure to pay it all off.
- If you have a very short credit score, open just one credit card. You will probably be only able to open one credit card anyway but start small.
- It takes years to build credit, so take it slow.
- Use your first card carefully (pay off every month) then upgrade your card
- If you have a secured credit card, change or upgrade to a traditional credit card
- Consider getting a second credit card
- If your first card has an annual fee, consider changing it to a no-fee card. You may need to look through what your credit card company has and calling in to see if you can change to one of the no-fee cards.
- Monitor your score (make sure no errors and it keeps improving, free credit report every year)
- If you already have a few credit cards, you can continue to build your credit by having a few more credit cards and lowering your overall spend on your credit cards. If you have good credit, you can start using it to get credit cards with better rewards. I would personally recommend getting a 2% cash back card. I will be explaining why in an upcoming post.
Below is a link to CreditCards.com, where you can see what cards you are qualified for. Just putting in your information will not result in a hard credit inquiry. I know many people who have used the CardMatch tool to find out what cards they qualify for:
The goal is to have a few credit cards (5-10) but only using one or two of them at a time. I have a hard time managing three different credit cards so I would recommend people to stick to one or two to use for everything. I generally have one for everyday spend, and another for my business expenses.
Annual Fees
Watch out for annual fees. Many low-credit credit cards have annual fees, but hopefully you can apply for the ones that have no annual fee. The strategy is to open up a few no-fee credit cards and keep them open forever. Even if you don’t spend anything on it, having these cards open will extend your credit history. Your credit history is the length of your oldest credit account. Closed or cancelled cards do not count towards credit history so it is best to keep a no-fee card on your credit history.
Business Credit cards
I have a few business credit cards myself and unless you are incorporated, you don’t necessary need one. You can be a sore proprietor and still apply to get a business credit card with just your social security number. Business credit cards have different protections than consumer cards so watch out for that. Just using a separate personal credit card would be enough for business purposes, unless you have plans to grow your business into a separate entity or if you need a business loan down the road. I am only mentioning business credit cards to cover normal business expenses, not as a line of credit to borrow against for startup costs. Credit cards should not be used as a line of credit for any business.
You can see what type of business credit cards are available at CreditCards.com:
For more information about business credit cards, take a look at this article from Entrepreneur:
http://www.entrepreneur.com/article/81822
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