Building your credit for the first time can feel a little like the chicken and the egg. To build a good credit score, you’re going to need take out a loan or get a credit card. But you can’t qualify for a loan or get a credit card without some credit history,right? So, what do you do?Let’s start with a bank account.
You don’t really need a long credit history to opena checking account at your local bank. In fact, you may have a one already. Even thougha checking account won’t necessarily help you build credit history with the bureaus,that account may help you get your first credit card or loan from the same provider.
You see,if you already have a history of doing good business with the bank, they know you andvalue that business. That existing relationship can carry some weight when it comes time toget your first line of credit. Another idea is to put one or more utilities in your own name. While companies aren’trequired to report on time payments to your credit bureau, some do and some may be willingif you contact them and ask them to report your payment history on your behalf. Havingan electric, wireless or water service account in good standing won’t establish a creditscore on its own, but can be helpful for first-time borrowers since it shows lenders you’rea responsible person who pays their bills on time. Keep in mind though, the reverseis also true – even if a utility doesn’t report on positive payments, if a bill becomesoverdue and goes to collections, there’s a good chance it will land on your buddingcredit report as a negative.
These are some good first steps; but if that’s still not enough, a few other things to consider. Some banks offer credit cards for folks who want to establish, strengthen, or even rebuildtheir credit. It’s called a secured credit card –because you ‘secure’ the amountyou borrow with a security deposit. In other words, you provide collateral (something thelender gets to keep should you default on the loan) by depositing money in an accountwith the bank – your credit line is equal to the amount you deposit. You won’t beable to touch that money, or use it to pay off your balance, and you’ll still haveto prove to the bank that you have sufficient income to pay the credit card. The good newsis that the bank will be more confident that you’ll pay them back, even without greatcredit, allowing you to build or rebuild your credit.
Since you’ll be using your first card to build your credit, you’ll want to make surethat once active, your lender will report all those on time payments to the bureausbefore you apply. Most banks and credit unions do this, but some retail store cards, forexample, don’t.
If this isn’t the case -- the payment history isn’t reported--you may want to keep shopping for a card. Also, don’t apply for a bunch of differentcards if you keep striking out; all those hard inquiries and declines aren’t goingto help you build a score. Keep in mind; a secured card is different from a pre-paid card. A pre-paid card allowsyou to load the card with a cash amount ahead of time to spend later.
Pre-paid cardsare great for people who need a VISA or MasterCard to make a purchase, and can be a terrificgift idea, but they won’t help you establish credit. Another way to build credit is to see if there is someone who might be willing to co-signa loan with you -- for example, your parents or spouse. When someone co-signs a loan, youget the benefit of their good credit history, and this may help you get approved. You canthen build your own credit with a history of good payment on the co-signed account. Whoever co-signs the loan for you is taking on a really big financial responsibility – they’llbe responsible for the debt if you run into trouble – so it’s not something you shouldask for lightly. When you do get credit extended to you, it’s important to keep managing it carefully evenafter you’ve built a history.
You’re doing the right thing by getting them off on theright foot; now, make sure you keep those good habits the rest of your credit life.
There are some additional videos here that will help keep you on the straight and narrowwhen it comes to building out a long positive credit history that will eventually resultin a really good credit score.
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