Credit And Debt Management: Building Credit From Scratch
by Cathy Pareto
Now that we have a fair understanding of how your credit score is determined, let's introduce how credit is established from scratch. You must be of legal age (18) before you can enter into a contract, including a credit card agreement. It is also advisable that any first-time credit consumers request copies of their credit reports from each of the three bureaus even though there may be little information available. Reviewing this information will help you ensure that you have not been a victim of credit bureau reporting errors or identify theft. (To learn more about fixing any errors, see How To Dispute Errors On Your Credit Report.)
Next, if you do not already have one, it is highly recommended that you open a checking or savings account (or both) and use it responsibly. Lenders see individuals that have bank accounts as stable and likely more creditworthy, than individuals that do not.
Consider Getting a Cosigner
If you are young and your parents are willing to consider this, have one of your parents cosign for you when applying for your first credit card. But be aware that adding a joint account holder has its risks because either account holder can be held responsible for repaying the entire account balance if the other applicant is unable to pay. (Parents can read more a in Is Your Teen Ready For A Credit Card? and young adults can learn more in Getting A Loan Without Your Parents.)
Cosigning on other types of credit applications creates full liability as well, even though the primary applicant usually intends to fully repay the debt himself. Some examples of this are a parent cosigning a lease for a child's first apartment or a girlfriend cosigning a loan for a boyfriend's car. If the primary borrower stops paying the debt, the bill collectors will track down the cosigner and require her to satisfy the debt. If she doesn't pay, her credit history will deteriorate along with the primary borrower's and legal action may follow against both parties.
Start With a Store Credit Card
If getting a cosigner is not an option, consider starting your credit history with a department store or retail chain credit card, which is typically issued by a finance company, not a major lender. These creditors tend to offer easier credit to people, but credit limits for new credit consumers are usually set quite low ($1,000 or less) and the cards have much higher interest rates. If approved for a store card, be sure to limit your cards to just one or two. Don't overdo it, because too many inquiries or open lines of credit (LOC) can have a detrimental effect on your score. (Can't get a credit card without a credit history, and can't get a history without a card? Break the catch-
Your Last Resort: A Secured Card
If all else fails, you can apply for a secured card, which requires you to deposit and hold money in an account backing the card before you make credit card purchases. While this may sound like a redundant process, it actually helps you establish a payment history, which is critical to lenders. Check out credit.com or cardTrak.com for a list of secured credit providers.
If you opt for this method, screen the card issuer carefully, as the annual or application fees among different providers may vary (this is also true of unsecured credit card providers). Try to find a credit issuer that does not charge an application fee, has a low or no annual fee, allows you to convert your unsecured card to a regular credit card after 12 to 18 months of established payment history, and reports your history to all three credit bureaus. After all, if the issuer doesn't report to the credit bureaus, the card won't help build your credit history.
If you've been denied credit because of your credit report, you are entitled to a free copy of your report from the reporting agency the lender used. The lender must supply the credit bureau's name, address and telephone number, usually by a "denial of credit" letter. You then have 60 days after receiving the denial notice to request your free report.
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