Lenders want to see proof that you can handle credit before they extend new credit. The obvious question is, how do you get credit if you have no credit?
All consumers should take a cautious approach to applying for new credit. Each application for new credit can lower your credit scores. If you apply for several accounts, it can further reduce your scores.
If you have a well established credit history, then you should only apply for new credit when you actually need it. Occasional inquiries or new credit accounts should have a negligible effect on your scores.
When you are starting out with no credit, then you should start small. There are ways to build credit when you have none.
You might try opening a store credit card account. They are easier to obtain than a major credit card. There are downsides to store credit cards. The interest rate is normally much higher should you fail to pay off the balance in full each month. Also, you can only use the card at that store, so it should be a retailer that you ordinarily shop at for usual household items.
Banks and credit unions also can be helpful. If you have collateral to guarantee a loan, your chances of being approved for a small loan greatly increase. One source of collateral could be a vehicle that you own outright. You could take out a loan for $1,000 or so and pay it back over several months. Another option is to provide $1,000 cash toward a certificate of deposit or CD. The loan would be secured by the CD, thereby allowing the financial institution to eliminate risk by lending you money. Paying the loan off early can reduce your interest costs. For purposes of building credit, it is usually beneficial to make your regular payments for at least several months before paying off the loan early.
Installment loans are great credit builders. If you also are able to obtain and maintain a major credit card account, your credit scores will benefit from a good credit mix.
As with any contract, you should examine the terms of the credit account to make sure there are no surprises. Depending on the type of credit account, unwanted terms could include prepayment penalties, annual fees, transaction fees, club memberships or prohibitively high interest rates.
If you have new or bad credit, your options will be limited and the interest charges will be higher. As long as you use such accounts sparingly or pay them off wisely, you can reduce the finance charges that you pay.
Once you have identified the credit account that best fits your needs, make sure that you meet their qualifications. Applying for an account with stringent credit requirements is not advisable if you have a history of missed payments or defaults. Also, you will not qualify for preferred credit accounts if your credit history is too new to rate.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
Favorite quote:
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."
Thomas Jefferson
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