Establishing First-Time Credit

People with no established history of credit typically ask, "How can I get credit if I've never had credit? I've been turned down for credit because I've never had any, but no one will give me a chance in the first place to get any." Yes, it can be a vicious cycle, but everyone has to start somewhere. Many young adults are faced with these issues, as well as those who for whatever reason have paid cash for everything all their lives. Without credit, life can become needlessly more complicated. For instance, without a major credit card, you're prohibited from engaging in a number of routine (but nevertheless important) transactions, such as renting a car, booking a hotel room, or purchasing an airline ticket.

There are several ways to establish credit: you can use secured credit cards (also known as bad-credit credit cards), merchant cards, personal loans or even automobile dealers. The easiest method, however, is with the secured credit card. This is a VISA or MasterCard that is secured by a deposit in the financial institution issuing the card. For example, if you were to open an account with a bank offering this program and deposit $300, the bank would issue you a VISA or MasterCard with a $300 credit limit. The bank would pay you paid interest on the deposit account, but they would also charge you interest whenever you use the card. A secured card is a very effective way to help establish a new credit history or reestablish credit if you've had such problems in the past.

As you use the card, you'll receive a monthly statement. It's advisable to pay off the balance in full each month, because secured cards typically have higher interest rates than normal credit cards. But if you can't pay the full amount, you must make at least the minimum payment, and you must make it on time. As the payments are received, the bank will report the activity on your credit report. This is very important, because each month you're building a payment pattern for future lines of credit. Many banks will issue you an unsecured credit card after you've been with them for 18 to 24 months. The key, then, is making all of your payments on time.

It's vitally important that you understand the seriousness of paying back your credit cards or any loans that you take out. You never want go past the due date in making a payment. If you find that your payment is going to be late, notify the creditor immediately and explain your situation. Find out the number of days late you're allowed before it goes on your credit report (it's usually 30 days). Do not wait until the next month to make a double payment, because if the currently past due amount rolls into the next billing cycle, most creditors will automatically report it to the credit bureaus as a late payment.

When you're trying to establish credit, the credit grantors will generally look for six months to two years of credit and payment history. They'll also look at your income and the length of time you've lived at your residence. Be careful no to apply for more credit than you need. Too many open and unused accounts will hurt your chances of getting new credit in the future. Finally, once you've established new credit, make sure to review your credit report at least once every year.



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