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I received a question via e-mail by a reader, Michelle, yesterday. Michelle recently turned 19, and hasn’t got any credit. She wanted to begin establishing credit and so applied for a card at her local bank, which was declined due to a lack of credit history. Michelle wants to know what she can do to establish initial credit.
Credit cards are without a doubt the easiest way to establish credit. Try applying for a card at another bank: my first credit card came from an institution other than the one where I had banked for 6 years because they were able to offer me a card, whereas my current bank wasn’t. If you’re asked for a specific limit, ask for $500. This is generally the lowest available limit on basic cards and increases your chances of being accepted.
If this still fails, you will have to go with one of the following options: a secured card, or having a co-signer. A secured card is where the bank puts a hold on a sum of money and gives you a credit card with a limit equivalent to the hold on your account. You need to be relatively stable financially in order to do this safely, as generally those funds must be on hold for 18 months before the credit card company will look at your credit to see if they feel safe enough to release the hold. Your only other option would be to close the card, which will have negative implications on your credit.
If you have a parent or close relative willing to co-sign for you, there is a good chance you will be able to get a credit card without securing it as well. However, you need to be sure they are co-signing for you, and not simply adding you as an authorized user on a card in their name. If they simply add you as an authorized user, your credit is not affected.
Credit cards are the easiest way to establish credit, and it is good you want to get on it so early. A large determinant of your credit score is the length of credit history, so getting a card now and using it responsibly will have a large positive impact on your credit over time.
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[…] Reader Question: How do I Establish Credit? Credit cards are without a doubt the easiest way to establish credit. Try applying for a card at another bank: my first credit card came from an institution other than the one where I had banked for 6 years because they were able to … […]
[…] Reader Question: How do I Establish Credit? Credit cards are without a doubt the easiest way to establish credit. Try applying for a card at another bank: my first credit card came from an institution other than the one where I had banked for 6 years because they were able to … […]
[…] Question: How do I Establish Credit? Posted in April 1st, 2008 by in Uncategorized Reader Question: How do I Establish Credit? Credit cards are the easiest way to establish credit, and it is good you want to get on it so […]
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Wow, where to begin?
First, debunk the myth that you need credit to be successful. You want something? Save up and pay cash for it. Easy as that. If you can’t afford to pay cash for it (excluding a home), YOU CAN’T AFFORD IT.
“Starting out early” with credit is just what the CC companies want you to do. They want to take advantage of young people who may not have a grasp on money and reality in general. Sure, they will give you a CC, with a stupid high interest rate. Have fun paying that interest.
I already hear you asking now: “How can I reserve a hotel, rent a car, etc. without a credit card?”. Use a debit card linked to your bank account. Debit cards can function the same as a credit card. This is why you are asked at the store “debit or credit?”.
“How can I buy a house without credit?”. Simple. If you are responsible and pay your bills on time, go and find a mortgage company that does manual underwriting. That means, they look at your financial history and not just a silly FICO (aka I Love Debt) score.
While I definitely agree that you don’t necessarily NEED credit to be successful, using it responsibly (ie. never paying interest) does help you get a lower interest rate mortgage. Some people also do take out car loans, student loans and other credit-requiring debts.
Starting out early and RESPONSIBLY with credit (responsibility being the key) will increase the length of your credit history and make it better in the long run. High interest rates are definitely a problem, but if you’re charging an item or two per month to keep the card active and paying off the balance, the interest rate won’t affect you.
The only problem with manual underwriting is that not all companies do it, so it limits you and prevents you from possibly getting a good deal. Having a good credit history is important when it comes to buying a home.
I by no means advocate the using of credit cards to increase “spending power” and ending up thousands of dollars in debt, but I definitely think that if used responsibly they’re a great tool to use. I charge everything to my credit card, but have never spent a cent on interest charges or other fees. My credit is basically spotless!
I can see where you’re coming from with the “no credit” approach, but I find there are ways to use credit responsibly that end up being to your advantage!
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