Establishing Good Credit 101

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  • smiling-lady-holding-credit-card-468x282Taking your first steps into the world of credit can be difficult and frustrating. It’s a catch 22 – it takes credit in order to create credit. Without prior credit history, it’s often hard to obtain the cards and loans you need in order to establish a credit history. Don’t give up. Although you might get rejected any number of times when applying for a loan or credit card, there are lenders who understand that young or older people need to start somewhere and will be ready to help you establish initial credit ratings.

    While obtaining a major credit card might be your goal, without a credit history, the companies that provide them might not be willing to put one in your hands. Without established credit, getting approved for a major unsecured credit card is a challenge. Your road to that goal can start with a type of credit card that is usually easier to obtain, like a gas card or department store card. These often require only an address and proof of employment. While these cards might not do much for you, as long as you use them even a little bit, and pay the associated bills on time, you will be creating your first credit history.

    Alternatively, if you insist on obtaining a major credit card, you could opt for what is called a “secured credit card,” offered by some banks. Since they are designed to help people establish credit, they require a security deposit, minimizing the issuing institution’s “risk” when it comes to giving you a line of credit. Depending on the card and the credit limit involved, you can expect to pay $200 and $500 in addition to any other fees. Often, your deposit will determine how much monthly credit you will be given.

    While this type of card involves costs and an initial sum of cash, they are an excellent way to establish enough credit to allow you to graduate to a more desirable card and are easily accepted worldwide. Make sure the bank that issues your secured credit card regularly reports to the three major credit bureaus.

    Most auto loans are only available to individuals with good credit history. There are a select few dealerships, however, that take the risk of working with people with poor or no credit. The loans they offer, usually through in-house financing, will require paying a much higher rate of interest but will help you overcome the hump of starting with zero credit history.

    Many people are not aware that a Certificate of Deposit (COD) at their local bank can often act as collateral for a small loan. A small personal loan is a relatively easy way to establish credit, even if you don’t really need one. It will be easier to obtain from any bank if you have an active savings or checking history with them (and a good history, of course). Getting this type of small loan will involve collateral, in the form of a car or other personal property. In certain cases, however, banks will accept CODs as collateral in place of a physical property. If you have, for example, $1,000 dollars in a COD, a personal loan could be taken in the amount of $500, with the COD as a guarantee. If for whatever reason, you do not pay your loan, the bank will be able to take possession of your COD. The proper thing to do with the loan, at that point, is to deposit the entire sum in a savings account, and pay back the bank over the course of the next few months. This process is a perfect, harmless way to establish a solid credit history. Over the following months, every timely payment will be recorded in your credit history. The more positive updates your credit report receives, the better your credit score will ultimately be.

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    Sophie Wolfson

    Sophie Wolfson is the main contributor to the informative FinanceNow podcast As well as Director at ReFinanceMe, a privately held company that provides smart loan advisory services for its vast number of clients. Sophie has helped thousands of people design and manage their loan programs more effectively through her enormous experience in the field of personal finance, insurance, loans and mortgages. Her articles on TheMoneyExpert will give you important insights on how to manage your debt more effectively, potentially saving you thousands of dollars.

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