Establish Good Credit History From Scratch
It's not easy to build credit history from scratch. It can be even harder of you're a young adult, especially if you're under twenty one. It can still be done and should be done the right way so you can establish a rock solid credit score to secure your future financial well being.
The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 has made it even harder for young people to get credit cards. Back in the old days. Credit card companies used to set up shop at colleges across the nation and offer new college students little perks to get a credit card with them.
Companies are not allowed to do that anymore. Credit card companies are prohibited from that kind of marketing. Now if you are under twenty one you must show proof of sufficient income or assets to get a credit card.
"What came first the chicken or the egg?"
Lending institutions and creditors look at your credit history to make a decision on whether to loan you money or give you a credit card. If you have no credit history, there is no record on how you will manage or pay back your debt. As a result, many lenders and creditors will not take a chance and lend you money or offer you a credit card. So how do you establish credit history from scratch, read on.
What you'll find in this section:
- Why a good credit score is important.
- Become an authorized user.
- Apply for small lines of credit first.
- Apply for a secured credit card.
- Don't apply for several cards all at once.
- Pay on time and the day you get your bill.
- Monitor your credit history performance.
- Apply for an unsecured credit card after a year.
- Attempt to get approved for a car loan by yourself first.
- Get a parent, guardian, or responsible adult to co-sign.
Why a Good Credit Score is Important
A good credit score is the key to your financial well being and will determine how much extra money you will have to spend to buy something on credit or apply for a loan. The worse your credit history the higher interest rates you will pay, if you're approved at all.
It's much easier to build and maintain good credit history from scratch than to start off with bad credit and try to repair it later. Anything reported to your credit bureau will be on it for anywhere from seven to ten years.
Why you should care about your credit history:
- Whether you'll be approved for credit cards, car loans, mortgages, and student loans.
- Determine how much you pay for auto insurance on your vehicle.
- Will determine if you get a car, apartment or your dream home.
- How high of interest rate you'll pay on credit lines or loans.
Become an Authorized User
The first option is to become an authorized user on one or two of your parents existing credit card accounts.
Once you're eighteen, ask your parents to add you as an authorized user. Tell them you don't want a card, you just want to start establishing a solid credit history. They don't have to worry about you charging anything and you still get the good credit history as long as they are making timely payments.
Although you're credit bureau will show you're an authorized user, this is a good way to give your credit a boost. Most lenders will see that you're not really the one with the credit however some lenders may overlook the fact you're only an authorized user on the account.
Once you establish your own credit history it's a good idea to have your parents remove you from their accounts. You will want them to do this anyway in case anything negative happen to their accounts so it does not affect your history.
Apply for Small Lines of Credit
Apply for small lines of credit before moving on to larger lines such as a car loan and mortgage. This will keep you from spending unnecessary amounts of money on interest and bank fees and build a solid foundation.
- Secured credit cards
- Gas station credit cards
- Subprime credit cards
- Retail store credit cards
Apply for a Secured Credit Card
Secured credit cards are exactly the same as unsecured or regular credit cards. The only difference is you are required to put your own money down as a deposit, normally $300-$500. This provides assurance to the creditor or lender you'll repay your debt. Your credit limit usually starts out at the amount of your deposit.
Don't mistake a debit card with a secured credit card. Many people make the mistake of believing they are the same. Banks do not report your debit card usage to the credit bureaus; debit cards are not extensions of credit. They are just a convenient way to access funds in your bank accounts.
Creditors typically report secured credit card usage to the credit bureaus, secured credit cards are an extension of credit. When you purchase something on your secured credit card the amount is not deducted from your security deposit.
Each time you use your secured credit card or charge something, you are borrowing money from the company and obligated to pay back you debt. As a result, depending on how responsible you are at using your secured credit card will affect your credit report, both positively and negatively.
Don't Apply for Several Credit Cards at Once
When first starting to establish your credit history, don't apply for several different credit cards all at one time. Each time that you apply for a credit card your score takes a couple point hit. You really shouldn't lower your score when your overall goal is to raise it anyway.
Start out with one secured credit card and prove to yourself that you can keep the purchase to a minimum and you can pay it off every month on time. Then after a few months apply for another secured card and make smaller purchases on it and the one you already have.
Pay Your Credit Card Bill on Time
This is the most important step to achieving and maintaining a nice solid credit history and it seems to be the hardest step for individuals to conquer. As soon as you get your bill in the mail take the time to review it and make your payment.
By making your payment the day you get your bill you will never forget to pay it. Just one late payment this early into the game can have devastating effects on your credit score.
Monitor Your Credit History Performance
It normally takes approximately 2 months for information to show up on your credit report. When something new, like a credit card or loan, shows up on your credit report, your credit score will most likely drop a little until you demonstrate your ability to repay the debt.
After about 6 months or so of making timely payments on your credit card, you should check your status by reviewing your credit report and score. Pay attention to what is on your credit report and any positive or negative factors that may be listed. Keep an eye on your credit score also; make sure it is going in the right direction, up.
You have the right to get a free copy of your credit report once a year. This is true, however your FICO Score will not be included with these free reports.
You can get your credit reports and score several different places on the internet. The three major credit bureaus are Experian, TransUnion, and Equifax.
Not only can you get your credit report and score, you can set it up to monitor your credit bureau and send you email alerts for any unexpected changes. This provides a valuable service and can keep from becoming a victim of identity theft.
Read my section on how to get your credit report online to learn more on how to get your credit report online. If you'd like to know what's reported to your credit report, visit my section on how to read a credit report.
Apply for an Unsecured Credit Card
After making timely payments for 12 months on your secured credit card or cards you should be able to show your credit card company that you can responsibly manage debt. You should now give your credit card company a call and see if you can switch your secured credit card over to an unsecured credit card.
After you have made the switch to an unsecured credit card you will be able to free up your security deposit and your new credit card will most likely be a higher credit limit and come may offer some perks or reward points.
The main ingredient to building a good credit history is patience. Remember a good credit history and score is like having the world's best discount card when it comes to life's biggest financial transactions. It will take time to establish an excellent credit rating, but once it happens for you, you will save yourself thousands of dollars.
Attempt to Get an Auto Loan By Yourself
Although a co-signer will help your chances on being approved when buying a car if you have no credit history. You should try and get approved by yourself first. It will look much better in the future if you have a car loan on your credit as an individual instead of showing up on your bureau as a co-signed loan.
You never know what a lender is looking for at the time you're applying for an auto loan. You may have exceeded the requirements in every area with the exception of having credit history. What's the worst thing that could happen, You don't get approved? At least you tried.
Visit my first time car buying guide chapter to read more tips on how to buy your first car..
Get a Parent or Responsible Adult to Co-Sign
You can ask a parent or responsible adult over 21 and creditworthy to co-sign on an automobile with you. When you sign with a family member or friend, all the account activity will show up on both of your credit reports and you will both be responsible for the repayment of the car loan.
This can be great if you make timely payments, however it can negatively affect you and your co-signers credit history if you stop or cannot fulfill your contractual obligation by repaying your loan.
A co-signed loan on a credit bureau is not as powerful as a loan that shows as an individual account but combined with a few other types of accounts it will help build a rock solid history.
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