I am 21 years old and have never
had any kind of bill under my name.
when i try to apply for a credit
card, i am always rejected. i have
a full time job and average about
$1,200/month. i just moved back
into my parents house after 2 years
of living with my sister but i want
to get a place of my own. how can i
build my credit??
Establishing a good
credit history has never been as important as it is today.
It's not just that you'll need good
credit to get decent rates when you're ready to buy a home or a car. Your
credit history can determine whether you get a good job, a decent apartment or reasonable rates on insurance. One seemingly minor misstep -- a late payment, maxing out your
credit cards, applying for too much
credit at once -- can haunt you for years.
If you're just starting out, you have a once-in-a-lifetime opportunity to
build a
credit history the right way. Here's what to do, and what to avoid.
Check your
credit report
You'll first want to see what, if anything, lenders are saying about you. That
kind of information is contained in your
credit report at each of the three major bureaus: Equifax, Experian and Trans
Union.
Credit reports are used to create your
credit score, the three-digit number lenders typically use to gauge your creditworthiness. Lenders also may look at the report itself, as may the landlords, employers and insurance companies who use
credit to evaluate applicants.
Can you have a
credit report if you've never had
credit? Maybe.
Somebody else's information could be mixed in with your report, either through a
credit bureau mistake or because of identity theft; i.e. someone using your
personal information to open bogus accounts.
If that's happened to you, you'll need to clean up your
credit report before trying to apply for new accounts. The Federal Trade Commission has information that can help.
Establish checking and savings accounts
Here's a basic step that's sometimes overlooked by people seeking
credit. Lenders see these accounts as signs of stability.
Opening checking and savings account is also one of the few things you can do as a minor to start building a financial history. While you can't get a
credit card in your own name until you're 18 and can be legally held to a contract, many banks have no problem letting you open an account.
Many, but not all. If your bank balks, you need to either look around for another bank or consider opening a joint account with an adult.
Understand the basics of
credit scoring
You need to know that the two most important factors in your
score are:
Whether you pay your bills on time.
How much of your available
credit you actually use.
It's essential that you pay all your bills on time, all the time. Set up automatic payments or reminder systems so that you're never, ever late. All it takes is a single missed payment to trash your
credit score -- and it can take seven years for the effects to completely disappear.
You also don't want to max out any of your
credit cards, or even get close.
Keeping your credit use to less than 30% of your
credit limits will help you get the best possible
credit score -- and should help keep you from getting over your head in debt, as well.
Finally, you don't need to carry a balance on a
credit card to have a good
credit score. Paying your bill off in full is the best way to keep your finances in shape and
build your
credit at the same time.
Piggyback on someone else's good
credit
The fastest way to establish a
credit history can be to "borrow" another's record, either by being added to a
credit card as an "authorized" or joint user or by getting someone to co-sign a
loan for you.
Having a co-signer can allow you to qualify for loans you might not otherwise get. The
loan will show up on your
credit report and, if you pay it off responsibly, will help boost your
credit score.
If you default, however, you won't be the only one who suffers. The co-signer has basically promised to make good on this account, so any delinquencies will show up on her
credit report as well.
Being added as an "authorized user" has its risks, for you as well as the person giving you access to the card.
If your father makes you an authorized user of his
credit card, for example, his history with that account can be imported to your
credit bureau file, giving you an instant
credit record. If he has handled the account well, that reflects well on you. But if he hasn't, his mistakes would also become yours. Any late payments or other problems could make it harder for you to get future
credit than if you'd established your history without help.
Even if you trust the person adding you to the card, you may not be able to piggyback on his or her
credit. Some
credit issuers won't report authorized users to the
credit bureaus, particularly if the user is not married to the original card holder. If the point is to give you a
credit history, the person who's adding you as an authorized user should call the issuer and ask how (or if) your status as a user will be reported.
Apply for
credit while you're a college student
Credit experts used to warn college students away from those booths set up on campus by
credit card lenders -- the ones that promise free stuff for signing up. It turns out, however, that there's no easier time to get a card than while you're a college student, said Gerri Detweiler, author of "The Ultimate
Credit Handbook."
Lenders are willing to take risks with you that they won't once you graduate, probably because they know that your parents' willingness to bail you out will end once you get your sheepskin.
You still have to exercise some caution, though. Look for a card with a low or nonexistent annual fee and low interest rates. For now, just get one: Opening a slew of
credit accounts in a short period of time can make you look like a risky customer.
Apply for a secured
credit card
If you can't get a regular
credit card, apply for the secured version. These require you to deposit money with a lender; your
credit limit is usually equal to the deposit.
You'll want to screen your card issuer carefully. To be frank, there are a lot of bad guys in this particular niche of the
credit world. Some charge outrageous application or annual fees and punitively high interest rates.
Your
credit union, if you have one, is a good place to start looking for a secured card. You can also check Bankrate.com's list of secured
credit card issuers.
Ideally, the card you pick would:
Have no application fee and a low annual fee
Convert to a regular, unsecured
credit card after 12 to 18 months of on-time payments
Be reported to all three
credit bureaus.
If the issuer doesn't report to the
credit bureaus, the card won't help
build your
credit history.
Get a finance company card
Gas companies and department stores that issue charge cards typically use finance companies, rather than major banks, to handle the transactions. These cards don't do as much for your
credit score as a bank card (Visa, MasterCard, Discover, etc.), but they're usually easier to get.
Again, don't go overboard. One or two of these cards is enough. If you get many more, you may find that later in your life these accounts could prevent you from getting the highest possible
credit score. That's not a reason to avoid them completely, because right now they'll do you some good. Just don't apply for half a dozen.
Get an installment
loan
To get the best
credit score, you need a mix of different
credit types including revolving accounts (credit cards, lines of
credit) and installment accounts (auto loans,
personal loans, mortgages).
Once you've had and used plastic responsibly for a year or so, consider applying for a small installment
loan from your
credit union or bank. Keeping the duration short -- no more than a year or two -- will help you
build credit while limiting the amount of interest you pay.
Use revolving accounts lightly but regularly
For a
credit score to be generated, you have to have had
credit for at least six months, with at least one of your accounts updated in the past six months.
Use revolving accounts lightly but regularly
For a
credit score to be generated, you have to have had
credit for at least six months, with at least one of your accounts updated in the past six months.
Using your cards regularly should ensure that your report is updated regularly. It also will keep the lender interested in you as a customer. If you get a
credit card and never use it, the issuer could cancel the account.
Don't charge more than 30% of the card's limit.
Don't charge more than you can pay off in a month. As mentioned earlier, you don't have to pay interest on a
credit card to get a good
credit score, and it's a smart financial habit to pay off your
credit cards in full each month.
Make sure you pay the bill, and all your other bills, on time.
Finally, another thing you can do is to report montly payments like rent, utlilites, insurance, wireless phone, and other bills that don't show up on your
credit reports to a reporting agency called PRBC. It helps people
build credit by reporting payments to monthly bills that don't show up on
credit reports, to give a more accurate picture of your payment history. Current and previous history up to 3 years back can be reported and scored in a report that can be used with your traditional
credit reports
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