Credit-Building for First-Timers

Credit-Building for First-Timers

In today’s society, it’s almost imperative that you have at least some credit. Most establishments, before extending credit, will review a customer’s credit history. You know that without a major credit card, you’re somewhat hindered financially. It’s almost impossible to do simple things like rent a hotel room or car. Booking an airline ticket and, in some places, even writing a check, cannot be done without a major charge card.

But what if you don’t have a credit history? What if it’s your first time applying for credit? How do you establish credit when you’ve never had it? And how can you ever get it if no one will give it to you because you’ve never had it before? It’s the classic Catch-22.

Well, there are numerous ways in which first-time applicants can receive and build credit. We’ll discuss several of the better methods here. They include secured major credit cards, merchant credit cards, passbook loans, and automobile dealerships which have a first-time buyer’s program.

But before we get into how you can establish a credit history, you must be sure to understand the seriousness of repaying any credit that you receive and use, whether it be cards or loans. Undoubtedly, you’ve seen the many ads for credit repair, debt management, debt consolidation, and the like. Why are there so many of these commercials and advertisements? Because there are so many people who have gotten into financial trouble due to their use, and misuse, of credit.

Be aware that the best medicine is always preventative. Take steps to keep your credit spending under control. Develop a budget and stay within it. Get into the habit of using your credit card as cash; in other words, pay off your entire balance monthly. If you feel that you won’t be able to that, curtail the use of your card so that you don’t run up a large balance. Also, don’t be late making your monthly payments, not even once. If you find that you are going to be late, notify your creditor and explain the situation. They’re much more likely to be understanding and work with you if you’re proactive and contact them. And, never apply for more credit than you need. Too many open or unused accounts can hurt your chances of getting new credit. They also can be a major temptation to “live beyond your means”. Just remember, whatever you charge or borrow must eventually be repaid. Don’t dig yourself into a deep financial hole.

One very good way to establish credit is through the use of a secured major credit card. This program requires a collateral amount ($300, for example) to be deposited into a bank savings account. The bank will then issue you a VISA or MasterCard with a credit limit equal to your security deposit. As you use the card, make at least the minimum monthly payment billed, or much better still, pay off the entire balance monthly. In this way you’ll establish a payment history for future lines of credit. Just be sure that the bank reports your payment record to the three major credit bureaus. More information can be found on secured credit cards in our article Bad-Credit Credit Cards.

Merchant cards are individual store or chain-store credit cards. Generally high-interest, they can be slightly easier to get than the major credit cards. However, if the merchant does not report payment histories to the credit bureaus, these cards are a waste of time for the purpose of establishing credit. If they do send reports to the credit bureaus, once you have established a good payment history you’ll want to apply for a low-interest unsecured major credit card. When you have one or two of these major cards, cancel the merchant card. Most establishments routinely accept VISA and MasterCard.

Passbook loans are similar to secured credit cards in that the bank will loan you money based on a deposit account which you have with them, usually a savings account or Certificate of Deposit (CD). The savings account acts as the bank’s security for the loan, and the funds are “frozen” until the loan is repaid. Again, you must ensure that the bank reports your repayment history to the credit reporting agencies; otherwise this transaction is useless in helping to build your credit rating. For a more detailed discussion on this type of transaction, please read Passbook-Secured Loans.

Many car dealerships now offer first-time buyers’ programs. But be sure to read the “fine print”; know what you’re getting. Some lenders require a larger down payment, and most will charge you a higher-than-market interest rate. Compare programs; compare the total cost of the loan, also known as the annual percentage rate (APR). Read our article entitled How to Find the Best Car Loan. And as before, make sure that the lender which the car dealer uses reports their accounts to the credit bureaus. If they don’t, do not buy the car. It’s very important that your payment history be reported. If you do complete the purchase, be sure to make timely payments for the fist twelve months. Then you’ll be in a position to shop for refinancing at a lower interest rate because you’ve developed a good repayment history.

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