Keys to Obtaining Credit: First Time Credit

A typical question is, “How can I get credit if I never had credit? I’m turned down for credit because I never had any, but no one will give me a chance.”

It is a vicious cycle. However everyone has to start somewhere. Many young adults are faced with these issues as well as individuals who have sworn off using credit and pay cash for everything. Careful planning and strategies can get you the credit you need.

Without a major credit card you can’t rent a car or reserve a hotel room or airline tickets.

There are several ways to establish credit: secured credit cards, merchant cards, cosigners for credit, friends or relatives, and automobile dealers. (Each of these will be explained later in this section.)

It is important that you understand the seriousness of paying back your credit cards or any loans that you may receive. You never want to be late making a payment. If you find that your payment is going to be late, call the creditor and explain your situation. Find out how many days late you can be before it goes on your credit report. Don’t wait to make a double payment the next month. If the past due payment rolls into the next billing cycle, most creditors automatically report a late payment on your credit report.

When you are trying to establish credit, the credit grantors are looking for six months to two years of credit and payment history. They will look at your income and length of time you have lived at your residence.

Never apply for more credit than you need. Too many open and unused accounts will hurt your chances of getting new credit. Once you have established new credit, make sure that you review your credit report once a year.

STEVE’S STORY

Steve had never had credit. He was 19 years old and in college. When he replied to a credit card offer, his application was denied. The letter indicated that he had a negative entry on his credit report. Steve was confused, because he never had a credit card or any credit that he was aware of He requested a copy of ins credit report and was shocked to see a collection account listed on it The collection account was the only item on the report. Steve never knew he had a collection account until he saw it on the credit report.

Steve contacted us to see what we could do to help. With the collection account listed on his credit report, he would never be able to get credit. No one would give him a chance.

We instructed Steve to call the collection agency and find out what the bill was that they were reporting. The collection agency indicated it was a past doctor bill that had not been paid. Steve had never received a bill from either the doctor’s office or the collection agency.

Steve contacted the doctor’s office regarding the past due bill and made arrangements to pay the bill off. The doctor’s office agreed to have the collection agency remove the derogatory information from his credit report because no statements were ever received.

Once the collection account was removed, we had Steve complete an application for a secured credit card from a bank offering a secured credit card program. He deposited $250 into a savings account with the bank and was issued a secured credit card with a limit of $250. He was on the road to establishing new credit.

NEVER HAD CREDIT

Q. How can I establish credit when I have never had any?

One good way to establish credit is through a secured credit card. A secured credit card is a VISA or MasterCard that has been secured by a deposit to a bank offering tins type of program. For example, if you were to open an account with a bank offering tins program, and deposited $300 into an account, the bank would give you a VISA or MasterCard with a credit limit of $300. You would be paid interest on this account, however when you use your VISA or MasterCard you will be charged interest.

This type of credit is good to help you establish new credit or re establish credit if you have had credit problems in the past, including a bankruptcy.

As you use the card, you will receive a monthly statement. Pay the balance off in full or at least make the minimum payment on time. As the payments are received, the bank will report the activity on your credit re port. This is important because you are building a payment pattern for future lines of credit. Many banks will issue you an unsecured credit card after you have been with them for 18 months. The key is making the payments on time.

With a secured credit card, there may be an application fee and/or an annual fee. More and more banks are offering this type of program. Con tact your local bank to see if they offer any secured credit card programs. You also can look in the business section of your newspaper to see if they have information on which banks offer secured credit cards.

COSIGNING MY DAUGHTER’S CREDIT CARD

Q. My daughter just graduated from high school and received a credit card application. In the application it asked for a parent’s signature. Would this be a good idea?

I am always leery about any application that asks for a cosigner. The reason the credit card company is asking for a parent’s signature is to make sure the payment will be made and that you, the parent, are guaranteeing the line of credit. In other words, if your daughter runs up the bill and doesn’t make the payments, the creditor can come after you to collect. This is reported on your credit report as well as your daughter’s. If there are any delinquencies or defaults on the account, your credit report will reflect this.

I would not recommend that you cosign for your daughter. Most high schools don’t educate their students on the importance of credit and how the credit system works. The risk is too great for your credit rating to be destroyed by a young person who doesn’t understand how the credit sys tem works.

The best way to teach your daughter about credit is to help her get a se cured credit card. Have her save $300 and deposit it into a bank that offers secured credit cards. The bank will issue her a credit card with a $300 limit, secured by her deposit.

By having her get this type of credit, she will begin to understand how the credit system works and build a good payment history. After she has done this for one year, she will be in a better position to apply for an unsecured credit card.

COLLEGE STUDENT

Q. This is my first year of college. I’ve never had a credit card.

There are several credit card companies at school that are trying to solicit me to get one of their credit cards. Is this a good idea?

Colleges are full of companies offering VISA, MasterCard, and American Express cards to students.

The danger is that most of the students will get these cards and use them as power cards. For example, a student who has just got a credit card may want to impress his peers. He may opt to buy dinner for a group of friends, or use the credit card to make purchases such as stereos, televisions, CDs, and so on. These purchases are being made with the mentality that he only has to pay $25 per month. Wow! What a deal! The dangerous thing is that when reckoning day comes, the statement arrives and there are $500 worth of purchases. The interest rate is 21 percent. If the student never makes another purchase using the credit card and makes the mini mum payment each month, it would take approximately seven years to pay off and cost him $404.64 in interest charges. And if the student is ever late or defaults on the payments, it will be reflected on his credit report for up to seven years.

I believe a college student should get one credit card, providing she keeps track of her purchases and pays the balance off in full each month.

That is showing responsibility and will reflect as a good payment history on her credit report, which can help in the future.

USING A FRIEND OR RELATIVE FOR CREDIT

Q. I am trying to establish credit for the first time. Someone told me it would help to have my name on a friend or relative’s credit card. How does that work?

There are two ways that you could use this technique in trying to establish credit in your name.

Once a credit card is issued to an individual, frequently the card issuer allows the cardholder to request an additional card in another person’s name. Ask your friend or relative to obtain a card in your name.

You could tell your friend that she can keep the card because you will not be using it. Ask her to request that the credit grantor report the payment pattern on your credit report. That way a positive credit rating will be established for you. If for some reason the friend or relative cannot make the payment, have her let you know so you can help. Otherwise your credit report could be hurt by nonpayment.

If your friend or relative doesn’t mind you using the credit card, make sure you keep track of all the purchases you make and make the payments on time. It would be better if the credit card was only used by one person so your purchases would not be confused with the original cardholder. Have the statement sent to your friend or relative. Make the payment to the credit card company on time. That way your friend or relative will feel secure.

Once you have established a good payment pattern on your credit re port, apply for your own credit card. Have your friend or relative cancel the card with your name on it. If there is still an outstanding balance, make sure you continue to make the payments to reflect a good payment pattern.

MAJOR CREDIT CARD VERSUS MERCHANT CARD

Q. I have never had a credit card in my name. A local merchant indicated that I could apply for its credit card. Would this help me establish credit for the future?

A merchant’s card could be good providing it reports your payment history to the major credit reporting agencies. If the merchant is not a sub scriber to the credit reporting agencies such as Experian (TRW), Trans Union, and Equifax, your payment history to that particular store will not be reflected. It basically would be a waste of effort for establishing credit.

When applying for credit for major credit cards, department store cards, and any type of lending institution, a credit report is always run to evaluate your paying history. Make sure the merchant is a subscriber to the reporting agencies.

Once you have a merchant card and have established a good payment history, you should apply for a VISA or MasterCard. Look for a low- interest credit card. Most merchants charge high interest rates.

When you have one or two VISA or MasterCard’s, cancel your merchant and department store credit cards and only use the low-interest credit cards. Most establishments accept VISA and MasterCard.

ATM VISA/MASTERCARD

Q. I have a checking and savings account. I was issued an ATM card to use as a VISA card. Will this help me with my credit report in establishing credit?

Using your ATM card as a charge card will not help your credit report. It won’t be reported as a credit card.

An ATM card is not a credit card. The amount for any purchases that you make with your ATM card with the VISA or MasterCard insignia is directly taken from your checking or savings account. There is no statement sent to you at the end of the month to make payments on the purchases because the money was automatically taken from your account and paid to the merchant.

By using your ATM VISA card you can keep better track of your purchases. It can be used the same way a credit card would be used for reservations and purchases, but there is no billing other than the automatic transfer of the funds from your bank account to the merchant’s account.

FIRST-TIME BUYER AUTO PROGRAMS

Q. I have seen advertisements for first-time buyer automobile purchases. Will this help me establish new credit?

Any time you respond to an advertisement for a first-time buyer purchase for an automobile, always read the fine print. Make sure you under stand how the program works.

The car dealer may require a larger down payment or deposit for the car. You also will probably pay a higher interest rate than you would from a financial lender.

Make sure the loan company that the car dealer uses to place your loan is a subscriber to the credit reporting agencies. If they are not, don’t get the car. It is important that your payment history is reported to the credit reporting agencies.

If you complete the purchase and pay on the car for at least 12 months, you can shop around to another lender that offers a lower interest rate and have the new lender refinance the car.

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