Starting your good credit

You need good credit. The quality of your credit affects anything from your cell phone bill deposit to your application for a home loan. A good credit history takes time to build, and if you’re ready for it, a credit card can be a convenient way to establish that history.

Sometimes, however, it can be difficult to get approved for that first card. Lenders want to see your credit history before issuing credit — they want to know if you can be trusted to repay debts, based on your past behavior. But if you’ve never had credit, you don’t have a history, and an issuer doesn’t know what kind of borrower you’d be.

If you apply for credit and you are rejected, you’re entitled to know why you were rejected. If an issuer cites a lack of credit history, don’t worry — it doesn’t have to be an endless loop of a problem. Here are a few things you can do.

Get a secured credit card.

Most credit cards are “unsecured.” If you fail to pay your balances, an issuer doesn’t have collateral to use as repayment for y our debt. Car and home loans are “secured,” because the car or home acts as collateral.

With a secured credit card, you put up a cash deposit, and you borrow against the amount of the deposit. Your cash deposit will be returned to you when you close the card, or if the financial institution changes your card to an unsecured version. With that deposit acting as collateral, the risks are lowered, both for you and the financial institution.

Once you have a secured credit card, you can establish a healthy pattern of credit use: pay on time, make small purchases, and pay off your balances. Your payments, your limits, and your balances will be recorded on your credit reports, and you’ll have a positive credit history before you know it.

Check your financial institution.

If you have an account with a financial institution already, you may have a greater chance for approval there. If your institution can see that you’ve behaved responsibly with, say, a checking account in your name, they may be more willing to extend you credit. If you have records of consistent payments made for your cell phone bill, utilities, rent, or any other long term financial agreements you have, bring those along with you. Make your case that you’re financially responsible, and you could be rewarded with your first credit card.

Check retail store credit cards.

Retail stores tend to have less stringent methods for approving for credit. However, they also tend to charge higher annual percentage rates, which can cost you more money if you end up carrying a balance. Look into these cards, compare them with other cards on the market, and apply for one if you’re comfortable with the terms offered.

Just remember: As with a secured credit card, your main purpose is to establish a healthy pattern of credit card use. Don’t buy more than you can afford, pay off your balances quickly, and you’ll be well on your way.

Once you have a card, use it carefully.

When you get your first card, you might feel lightheaded looking at your credit limit for the first time. It’s at this moment that you should use the most caution — make small purchases and use your card sparingly, while you’re getting used to your new purchasing power. You’ll build a positive credit history right out of the gate, and with some savvy, you’ll keep it that way.

Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.


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