Real Estate Community Forum

I am having trouble establishing a credit history. Currently, I have no credit at all, what should I do to get started building my credit?

...ahhh, the classic chicken/egg quandary.

The best way to establish credit when you don't have any, as opposed to having bad credit, is to apply for 1-2 revolving accounts like credits cards, "gas" cards, store credit cards etc.

While there are some very excellent products on the market serving this niche, don't aim high...lenders are taking a risk without knowing anything about you due to a lack of established credit history...consequently, the interest rates and fees will be high and the credit limits very low.

But don't lose heart...it's a start. With steady, on-time payment coupled with smart use of your credit accounts, you will be on your way to an excellent credit score in no time.

It doesn't take much...in fact, during his college years my brother had a credit score in the high 700's with only 2 active trade-lines, each less than $500.

Stay away from companies that seek to pray on those in your situation. Remember the adage, if it sounds too good to be true...

You will have much better luck with small, locally owned community banks and credit unions. Go in, speak to a banker and explain your situation. Often times institutions such as these are happy to get you started on your financial path.

You may be able to get a credit card with a small credit line, or a secured credit card where your credit line is secured by a deposit you have in a CD or savings account with the same institution.

For the same reason, it is often easier to qualify for a loan that is backed by collateral, for example an automobile, or appliances from a home improvement store....or even a home. As opposed to unsecured credit, a lender can re-possess the collateral if you don't make good on your obligation to repay and that reduces the amount of risk taken by the lender.

Getting approved for "store" credit, like a Sears card or an ExxonMobil card can sometimes be easier than getting a lender to give you a general-use Visa or MasterCard.

If you're able to, you should ask a friend or family member with more established credit history to add you on to one or more of his/her account(s) as an authorized user. This way you benefit from instant reporting of the good credit history of the primary account-holder.

As an extension to the above, if you're able to coax a loved one to co-sign a loan obligation for you, that may be a good way to go...as the lender will consider your co-borrower's credit history in making a lending decision. A word of caution, however, co-borrowers are equally responsible for the obligation to re-pay a debt...so it can be a quick way to sour relationships if financial difficulties arise preventing you from making good on your word.

If you're going to apply for a general purpose credit card, do try to stick with well known companies. While this in not an endorsement of any specific company, large banks and financial institution have a reputation to maintain and generally do not peddle credit products laden with predatory terms.

In addition, competition in the industry if fierce and such institutions have a vested interest in being your first lender because they hope you will continue giving them business when your credit history is more seasoned.

Some big name banks that offer secured credit products and/or "student" credit accounts for those with limited history are:

Citibank
Bank of America
CapitalOne
Washington Mutual
US Bank
American Express
Discover
...and of course, your friendly neighborhood credit union.

I hope this helps!

I was in this boat as well. I had a beacon credit score, but no credit history so I was unable to get any type of credit card. I thought the no credit history part was odd as I paid off all my student loans and was always on time.

What launched me into the credit world was when I bought my first car. I had the cash in the bank to pay for it outright, but decided to put zero down and finance it over three years, using the cash as collateral. A couple months later, I again tried to apply for a credit card and WAS ACCEPTED! I got a line of credit much larger than I was hoping for.

I am now spending a tiny bit on that credit card and paying it off in full every month. I'm not an expert in this area, but I've heard the credit tracking companies are not so concerned with the amount you spend on your card, but the frequency and your ability to pay it back. So I'll fill my gas tank once a month with that card... and that's about all I use it for.

Hope this helps someone out there,

Yuu

I would recommend using a secured credit card to establish (or re-establish) good credit. While I worked in banking we used to recommend Providian as the most reputable. Since then I think they've been purchased by WaMu so their card offerings may have changed. With a secured card, you'll receive a credit limit for whatever you put on deposit. After a year or so of on-time payments, you'll start getting credit limit increases.

A common mistake is changing cards too often (card surfing), usually because someone offers a higher credit limit. Don't take the bait. You'll have a higher credit score the longer you keep the account open, as this shows stability which is a key concern for lenders. It typically hurts you to have more than 3 revolving credit accounts, so don't open too many accounts in the rush to have high credit limits. It'll happen faster if you stick with 3 or less. Call them annually and request credit increases or lower rates, especially if your income goes up. The worst that can happen is they say no. But sometimes they'll say yes in order to retain you as a customer.

Another way to increase credit is to consider leasing a car. A lot of times these are easier to qualify for instead of an actual auto loan. It shows up on the credit report as a revolving credit account. Dealerships have a knack for getting leases approved in order to sell a car, so if you're sure to make your payments on time this can work to your advantage in building good credit. I've also seen credit wrecked because of leases, so be sure to abide by your lease restrictions lest you end up with what is called a "deficiency balance" when you turn the vehicle in.

John

When I was in college, I had no credit history. I was amazed to learn that, "no credit history" was worse than a "bad credit history". I knew eventually that I had to establish a credit history so I went to the student union and looked at the bulletin board that was full of advertisements. One of the ads were for establishing a line of credit with Discover Card. I completed the application, which was my name, address, and amount of yearly income along with a photo copy of my student ID card. I sent in the application and within a few weeks I was given $2,000 dollars line of credit. It was that easy! Things may have changed since then, but I do recall an episode on Dateline that exposed how credit card companies go after college students because they are more likely to use credit cards.

There might be a better question than simply, “How do I get credit?” The best question to ask is, “How do I get the best credit possible?” Once you’ve gotten your two or three credit cards and use them regularly and pay the balance on time, your credit rating will start to climb. But this won’t happen for six months. That is the period when the fact that you are prompt with payments starts to have an effect.

During that time you can do two things that might lower your credit rating. The first is to charge more than 50% of your total credit limit. This shows up as a negative, no matter how careful you are to make payments on time. The other is to make your payments late.

This can happen for reasons you can’t control. A payment can be lost in the mail. The credit company might not even let you know the payment is missing. Recently it appears that some credit companies delight in being able to assess late fees and take any opportunity to do so. A call to the company might clear a single late payment from their record. It might not, however, come to your attention until they file a report with the credit reporting agencies.

Customer charge cards issued by department stores and home improvement centers have the worst reputation for this. Today most such cards are managed by outside firms. It is in their interest to be aggressive in collecting the debt. Whether this makes you less likely to use the credit card is not their main concern. The store itself might be interested, but the management firm is definitely not.

One very good way to stay in control is to visit the card website every month to check your balance. It will show your recent payments and the dates posted. You may not pay your bills online, but you can certainly guarantee they received your payment with this tool.