Credit is one of life's great Catch-22s. Let's say you've just graduated from high school and want to get your first credit card. You dutifully fill out the forms and wait for a reply from the issuing bank, only to find out later that you've been rejected. Why? Because you don't have a credit history. But how do you establish a credit history? Well, you get a credit card, of course. It's a frustrating conundrum, but luckily there are a few easy and inexpensive things you can do about it.
- If you want to establish a credit history, first check your credit report to make sure you don't already have one.
- To build your credit history, consider applying for a secured credit card or a store credit card. Debit cards won't help.
- Once you've started to establish a credit history, keep it in good shape by paying bills on time and not letting your credit utilization ratio get too high.
Review Your Credit Report
First, make sure that you truly have no credit history by getting a free copy of your credit report. You may be surprised to discover that because of a gym membership or a student loan, you actually do have a credit history. It might be for a very short duration, but it could be all you need.
If you've recently been rejected for a credit card or loan, you are entitled to a free copy of your credit report from the credit bureau the lender used to check on you. The three major credit bureaus are Equifax, Experian, and TransUnion. Even if you haven't been rejected for credit, you can still get a free copy of your credit report at least once a year from each of the three bureaus. You can do this through the official website, AnnualCreditReport.com.
Your credit report doesn't include your credit score. If you want to know your score (if any) some companies will charge you, but you can get a general idea of it by using one of the free credit score estimating tools that are available online. Once you have a credit card, the credit card company may also provide your score free of charge.
Start to Build a Credit History
"Sin writes histories. Goodness is silent." Unfortunately, these famous words from Johann Wolfgang von Goethe often ring true in the area of credit reporting. While it would seem that having no credit is a good thing because it can indicate that you've been financially solvent enough to pay cash for every purchase you've ever made, lenders want proof that if they give you money, you won't take it and run.
If you've determined that you definitely don't have a credit history, or if the history you do have isn't sufficient to get you approved for a traditional credit card, here are some of your options:
Get a Card Through Your Current Bank
You may not have a credit score, but if you have a checking account with a bank, that could help you get approved for a card. At the very least, you could qualify for a secured credit card. A secured card requires you to keep a certain amount of money on deposit, which then serves as the credit limit on your card. Your credit limit on a secured credit card may not be very high, but you have to start somewhere. Once you've established a good track record with that card, you should be able to get an ordinary, unsecured credit card.
Another option is to take out a small secured loan from the bank and pay it back over time. Unless this is the only option you have, it's a waste of money. You'll have to pay interest on that loan, and no matter how good the interest rate is, why pay to borrow money that you don't even need? With a secured card you can avoid interest charges by paying the bill in full each month.
Note that while debit cards look and function much like credit cards, they will not help you establish a credit history.
Apply for a Store Credit Card
Store credit cards, offered by major retailers, generally have more lenient approval requirements. These cards often come with an account-opening bonus, such as 10% off your first purchase. So, the next time you need to buy something from your favorite store, consider taking advantage of its credit card offer to help establish credit. Just make sure you have enough money to pay the bill in full when it arrives, as interest rates on store credit cards tend to be very high.
And if you apply but aren't approved for one store's card, that doesn't mean you won't get approved for another. So just try elsewhere.
Finance a Store Purchase With an Interest-free Offer
Especially around the holidays, stores often let you purchase items on credit with a "same as cash" offer that charges no interest for a set period of time—usually 90 days. Since this is a type of loan, it can help you establish good credit if you pay on time. To avoid paying interest or hidden fees, make sure to pay it off completely before the allotted period expires. Offers like this can be found both in stores and online.
Don't be in a rush to close old credit card accounts even if you rarely use them. Your credit score is based, in part, on how long you have had your accounts.
How to Use Credit Once You've Got It
Once you have credit, watch how you handle it so you can keep your credit score up. That means paying your bills on time, not applying for more credit cards than you need, and keeping your credit utilization ratio low. (That's the amount of credit you're currently using compared with the amount of credit you have available to you. A high ratio tells lenders you may be in too deep.)
Bear in mind that one of the factors that figures into your credit score is the length of time your accounts have been open, longer being better. So even if you prefer to pay cash for purchases, merely keeping your credit card account open can help you achieve and maintain a high credit score.
Having a strong credit score will not only help you next time you want to take out a loan or apply for a credit card. It can also affect your insurance rates and even whether you can rent an apartment or get a job with some employers. So establishing a credit history will be worth the effort for years to come.