Catch 22: Establishing Credit Without a Credit History
By Teresa Ambord
In today's world, a good credit history can open many doors. Lenders aren't the only ones who look at it. If you apply for a job, rent an apartment, or try to get auto insurance, your credit history might be reviewed. And without a credit card, it can be hard to rent a car, reserve a motel room, buy online, or get a cell phone account.
If you think you can't get credit until you've got a credit history, you're wrong. You just have to know how to start. Here are some steps to take:
Open a checking account. Some banks will let you open an account with a parent when you're only thirteen. Learn how to write checks and how to keep your checkbook balanced. If you handle the account well, the bank may give you a good reference when you apply for credit.
You'll need your parent's permission to get a credit card if you're under eighteen. If you're younger than that, ask your parents if they'd be willing to get a joint credit card with you.
If you're 18 and applying alone, start by trying for a card you stand a good chance of getting, like a low-limit gas card or department store card.
You can also apply for a secured card. That means you must deposit a certain amount in a savings account, say, $250, in exchange for a credit card with a $250 limit. If you fail to make the payments, the credit card issuer takes it out of your account. But don't let that happen since it defeats the purpose, which is to build trust with lenders.
Once you've got a card, make the payments faithfully. Mail payments a week or more early. If you pay online, don't wait till the last minute or the payment may not post on time. Whatever you do, don't get the idea that credit is extra money. It's really just another way to spend money you already have. Keep that in mind and you won't get in trouble.
Pay more than the minimum to keep your balances under control.
Some people tell you to pay off the balance each month. That's a good habit once you have credit. But since your goal is to establish credit, carry a small balance for two or three months to show the lender you can handle it.
Once you've got a good record with one of these cards, you may want to apply for a VISA or Mastercard. But shop around for one first.
Here's what to look for:
- no annual fee
- low interest
- a 20 to 30 day grace period before interest is charged
- no processing fee
- and don't fall for a low introductory interest rate that will go up in a few months
- minimum charge. That's just another way of raising interest. You may owe nothing on the card and still have to fork over a small minimum charge fee every month. You can do better. Remember, credit card companies are in stiff competition for your business.
Once you've begun building a credit history, guard it jealously. If your credit is bad, you'll pay through the nose when you want to make a major purchase like a car.
Here is how to protect your good credit:
- Obviously, pay at least the minimum on time.
- Send payments to the payment address. If you send it to another address at the same company, the card issuer is not required to post the payment for several days, which may cause you to be late.
- Don't apply for a lot of accounts. Every application causes an inquiry on your credit, and a large number of inquiries will lower your score.
- Once you have credit, don't close accounts. Closing accounts shortens your history, and that works against you. It's better to cut up the cards and not use them.
- Keep your balance to 25 percent of the card's limit. That's not only smart spending, but it can boost your credit score since this shows lenders that you exercise restraint.