6 Ways to Build Credit While Working from Home
As a work-from-home partner, it can be difficult to build credit. However, because your credit is considered separate from your spouse's, it's a good idea to make sure you are building your own credit profile. If you've been at home for a long time, or if you've always been at home, you could have a thin credit file, which could work against you if you suddenly find yourself needing to qualify for a loan or credit in your name.
A healthy and active credit file reflects your ability to handle borrowing and repayment responsibly.
But how do you start when you work from home and you might not have the same paper trail for your finances as your partner? Here are six ways to build credit while you work from home:
1. Pull your credit report
First things first: Pull your credit report for free at AnnualCreditReport.com and check for any errors. Look for mistakes such as a wrong address or an account you don't recognize. Dispute any errors, and continue to check your reports periodically -- you can check one report every four months for free by alternating between the three major credit bureaus, TransUnion, Experian and Equifax.
2. Open a joint credit card account
A joint credit card account allows you and your partner to benefit from great payment patterns.
Remember, though, that you are as responsible for any debt on the card as your spouse -- even if, say, your home business hasn't taken off yet and you aren't making as much money as you would like. If your spouse runs up bills, this is also reflected on your credit. It can also be difficult to remove yourself from a joint account, particularly if there is debt on the card. Finally, issuers are increasingly opting out of allowing joint cards.
3. Become an authorized user
As an authorized user, you benefit from your spouse's good credit habits, have access to a card with your name on it, and you are not legally responsible for the debt.
When developing the FICO 8 scoring model, Fair Isaac wanted to ignore authorized user accounts, since it's been fairly easy to game the system in the past. However, because there are so many "legitimate" authorized users (such as parents, children and spouses), FICO relented and authorized user information for those with appropriate relationships is included in the algorithm.
"Once you are added as an authorized user on a credit card, the history on that account gets added to your own credit report after a few months," says Reno Frazita, a money expert and the president of Secure My Funds. "If that account has a good payment history, and low balances relative to credit limit, becoming an authorized user can greatly improve your own credit score."
Frazita also points out that while an authorized user isn't responsible for repayment on the loan, poor credit decisions on the part of your partner could hurt your credit. Luckily, it's normally pretty easy to have your name removed from the credit card.
4. Open a secured credit card account
You don't need to rely on your partner to help you build credit. You can open a secured credit card and use it to make small purchases. You can build credit for a home business, as well as for personal credit.
Here's how a secured card works: You put down a deposit, say $300. Then, you are allowed to borrow up to $300 at a time (or more, depending on the card). Make sure the card issuer reports to the three major credit bureaus. Otherwise, your credit won't benefit from the card. The issuer uses your deposit only if you fail to repay in a timely manner. Once you close the card, the deposit should be returned to you.
"If you need to build credit, start off with a little $200 secured credit card and underutilize it," suggests Wayne Sanford, "The Credit Guy" and owner of New Start Financial. He says to charge no more than 20 to 30 percent of your credit limit at any time. That means don't owe more than $90 if you have a $300 limit.
Ideally, put a small charge on your card each month, and pay on time and in full. By doing these two things, you will be satisfying 65 percent of what FICO looks for in a good credit user.
5. Get a co-signer
You can also build your credit with the help of a co-signer. I once co-signed on a loan for my husband because his thin file prevented him from being able to qualify for a loan by himself, and he was able to get his own credit after a few months.
A parent, relative or good friend can act as a co-signer to help you borrow and repay a loan. Because the co-signer will be on the hook for your debt if you default, you may need to work to convince him. Perhaps you can set up a system so that he gets regular reports on payments, or you might provide something valuable as collateral.
6. Get an unsecured loan on your own
After you have spent some time building your credit and as your home business begins to see more income, you will be able to apply for your own credit card in your own name. Even if you trust your spouse, and you generally combine your finances, your finances will be in better shape if you can establish your credit separately.
As soon as your credit file has thickened enough for you to apply for an unsecured card or a small personal loan at your local bank or credit union, do so. You shouldn't rely on someone else's credit forever, and secured credit cards should only be viewed as a temporary solution.
Working from home doesn't mean that you have to settle for a thin credit file. Take steps to build your credit, and you'll have a great financial reputation to complement your business reputation.
Miranda Marquit writes about building credit for Credit Card Guide, a site that educates consumers on improving financial habits.