Last updated on December 10th, 2023 at 07:53 pm
You might think that poor credit or no credit means you cannot become an investor. While it is true that poor credit might limit your options, it does not mean that you cannot be an investor on some level. The key is to understand your situation and work with it. In other words, you will not be able to invest like an accredited investor and throw a lot of money at stocks or other traditional investments. Let’s walk through some strategies and talk about how you can still be an investor with poor credit.
First of all, if you have the money, even a little money, you should invest if you can afford to. In other words, prioritize and budget based on your bills and formulate a debt repayment plan. Wisely investing your money is a key piece of building long term wealth. You are not going to build wealth by paying your bills and just making interest payments – you are only making someone else wealthy.
Start Small
Begin with investments that require very little capital, such as micro investing platforms that don’t require a minimum balance. There are numerous apps out there such as Robinhood that allow you to create an investor account and are low or no fee. From there, look to invest in low-cost ETF or Index funds. These funds track the major indices such as the Dow or S&P 500. They will not make you rich overnight, but historically they do provide nice returns. Be sure to select a fund that is low overhead or low cost, so your earnings aren’t eaten by the fund administrative costs.
Alternative Investments
There are alternatives to a typical stock market investment. Crowdfunding and peer to peer lending platforms are also terrific alternatives that have low minimums and are relatively safe while providing decent returns.
Look into peer-to-peer platforms such as Prosper, which has a mobile app and lets you build a portfolio of private credit loans you can help finance and earn anywhere between 5 and 15% (on average) return on your investment. You can help people by funding their loans and also earn money. Note that if you have a borrower account with Prosper you will probably have to create another account to invest.
Crowd funding is also an option if you want to get into Real Estate investments. Apps such as Landa allow you to directly invest in real estate without the hassles of becoming a landlord. If you prefer to stick to something safer, you can also invest in Real Estate ETFs on the stock market. There are fees associated with them, so select one with a low fee to get started.
Become an Investor by participating in Your Employer’s Plan
You should be investing in a 401k or Roth / IRA account for retirement already through your employer. If you are not, prioritize that as soon as possible. Many employers tend to match contributions up to 2 – 5%, which means your employer will match potentially up to 5% of your contribution towards retirement, which amounts to free money in an investment account. You can start small here too, as little as 1% makes a difference.
Employers who are listed on a stock exchange also typically offer employee discounts on stock purchase as well. This means you can buy shares of the company at a discount. Note there are sometimes eligibility rules around the purchase and selling of the stock, so you will have to read up on it and ask your employer any questions you may have.
The nice thing about both these avenues is the money you invest in this way is usually pre-tax, meaning the money is deducted from your paycheck before taxes which might lower your tax liability – or it least it means you won’t get double taxed when you cash it out.
In most of these cases, credit score is not a factor in the investment strategy.
Improve Your Credit
Improving your credit means more favorable terms for lending and you will more than likely have more money to invest with. There are countless articles on this site on how you can start improving your credit. In a nutshell, paying off outstanding debts, making timely payments, and managing your finances responsibly can help boost your credit.
Save and Budget
Focus on saving money and creating a budget to manage your finances effectively. This can free up funds for investing and demonstrate responsible financial behavior.
You can also open an online savings account which have much higher interest rates than a brick-and-mortar bank. The higher the APR, and the more money you can deposit into the account, the higher return on your investment. Right now, interest rates are at a high and online savings accounts are near 4%. You can watch your savings grow through the miracle of compound interest. (It is a miracle here because you are profiting from it. When you are in debt, compound interest becomes your enemy. That’s why it is so important to pay down debt and make more than the minimum payment when possible.)
Education and Skill Building
Make an investment in yourself! Take the time to learn something new, maybe it’s an online course or an informative book. Getting you in a good place mentally is important. You might be able to monetize it someday soon. If nothing else, it will increase your earning potential over time which will allow you to invest more in the future.
Wrapping up
Investments aren’t one size fits all. You might think that if you have bad credit, you cannot be an investor. That isn’t true. You can take several steps to becoming a very good investor even if your credit is less than stellar. Little contributions and gains matter. Start small and be consistent. Always stay within the bounds of your budget.