You apply for a credit card because you need credit.
Unfortunately, the credit card issuer rejects your application. The reason: you
don't have a sufficient credit history.
You ask yourself, "How do I build a credit history when I can't get credit?"
Maybe you are debt–free and have always used cash to make every purchase.
You would think that being debt free is a
positive trait in the eyes of the lender, right?
Think again. To most credit extenders, having little or no credit history is almost
as bad as having bad credit.
So, why do you need a credit history, when you want to get credit?
It's really quite simple. A credit history gives the lender information as to how you
handle your financial obligations. Lenders need to know that you have good
credit habits. That's definitely not something you develop overnight. You need to have at
least one year of credit history to be seriously considered by most creditors. Some creditors
have even stiffer requirements.
What can you do?
Get a Secured Credit Card.
Ask your bank if they offer secured
credit cards. Your past credit history is less important when you apply for
a secured card because you are opening a savings account to secure the credit
line. If you deposit $500 into a savings account, you will be allowed to charge
up to $500 on the secured credit card. Some credit issuers are even more liberal.
They will grant you 250% of the amount you deposit (e.g., a $250 credit line with
a $100 deposit).
Purchase a Certificate of Deposit at your Bank. Take out a loan against it.
Another way to build up your credit when you have none is to do a deal with your bank. Purchase
a Certificate of Deposit. Then ask your banker to lend you an amount equal to, or less than, the
amount of your CD. Pay back the loan over a few months. Ask your bank to report the transaction.
You will have to pay a few dollars more in interest than you will receive from the CD. However,
the benefits to your credit report far outweigh the minor cost of the transaction.
Get a Retail Store Card.
Many retailers and vendors offer credit to consumers with little or no credit history. You can
get a card from a department store or gas company fairly easily. Many retailers will even entice
you by giving a 10% discount for your first day's purchases on your new card. However, make no
mistake, you will pay a high price for this type of credit. These cards often carry very high
interest rates. Beyond the cost, you must also understand that they are not more liberal with their
payment requirements than unsecured credit cards. In order to keep the card and not damage your
newfound credit, you must always pay on time. Therefore, always read the fine print to determine
what grace periods, if any, exist and the payment due dates. If you pay the balance off promptly,
you will also save money on interest charges.
Borrow good credit.
If you know a friend or family member with solid credit, you can borrow their good credit profile.
This person must have credit cards and trust you to be a "co–signer" or an "authorized user". Have
this person call his or her credit card company and request that you be placed on his/her account
as an authorized user. A copy of the card will then be sent to you. In order to benefit from the
"borrowed credit profile," it is not necessary to actually use the credit card. Soon, your credit
report should show an open account with all the positive credit history created by that account.
Maintain Active Accounts.
It is not enough to simply open an account and let it sit. In order to build a positive credit
history, you need to show reasonable activity and a responsible payment pattern. Lenders need
to see that you always pay on time when you use your account. And, you need at least one year
(sometimes more) of good credit history to be taken seriously by lenders.
Do you have an installment loan?
If you are making payments on a car loan,
you may already have a good credit rating. Paying off an installment loan on time
represents one of the best things you can do to build or enhance your credit because
it demonstrates good payment habits. Installment loans for a car, computer, or
appliance are often easier to obtain than unsecured credit
cards, and can give a boost to your credit file. Check your credit reports
to confirm that lenders are reporting every installment loan you are paying down.
If you discover that any are missing, ask your lender to report them to the credit
bureaus. Since you're paying them off, at least get the credit you deserve.
What NOT to do
Do NOT apply for more than one credit card at one time.
Multiple inquiries are bad for your credit and can cause you to be turned down. Too many inquiries
make you appear financially desperate. Lenders will also be alarmed by the numerous inquiries.
They will question both why you need so much credit and whether you have already been approved for
additional credit. Either way, your debt–to–income ratio will be perceived as high and you will
look like a bad credit risk. Inquiries stay on your credit report for 2 years.
Do NOT miss payments or pay late.
Not only is this not conducive to the image of the good customer that you want to show to your
creditors, late and delinquent payments are going to damage your credit rating. Not paying or
paying late makes you look like you can not handle your credit. Look carefully at the terms of
your credit, pay attention to grace periods or the lack thereof.
Do NOT pay the bare minimum.
When you get your billing statement, every lender indicates the minimum payment due. That
figure represents a small percentage of your actual balance. While paying the minimum on time
may help your credit rating, it can hurt you by allowing the remaining debt to rack up interest
charges. Even if you do not make new purchases, that interest can mount up quickly. Do not be
misled by the minimum payment requirement. Better yet, disregard it altogether. Properly
budget your finances and pay off your debts in a measured, timely fashion.
Building good credit is like building a good
reputation––neither happens overnight. Having good credit is a result
of both being a careful consumer and developing good habits. Good credit is not
easy to attain. It is a valuable asset that will yield benefits for a lifetime.
Credit Score: Your risk ranking and how to improve it.
