The First Accounts On Your Credit History
Utilize Someone Else’s Credit. The easiest way to start building your credit history is to utilize someone else’s credit that is already established. If you know someone, such as a family member, that you trust (and they trust you), you can be added onto an existing credit card as a joint account holder. This will include the credit card history into your credit report. Obviously, there is risk in doing this. If the person has previous late payments or suffers from more late payments, this information will go on your credit also. The same applies to maxed out credit limits. So, it could be a good and a bad thing; and therefore, you need to choose wisely. FHA loan requirements allow late payments as long as they are explained and the credit score does not suffer tremendously from it. When you apply for a FHA Home loans, keep in mind that all derogatory items must be explained.
Another way that you can utilize someone else’s credit is to have a co-signer. Many times a bank will be willing to loan you money if you have a co-signer who has established credit history and can demonstrate financial stability. The problem with this is that if YOU don’t make the payments, you are putting their credit at risk. I currently have a client who is looking to buy a house but can’t until we repair his credit report. A few years ago, his friend asked him to co-sign on an auto loan and then his friend let the car be repossessed. Now my client has a repossession showing on his credit report. FHA Loan guidelines view this as his responsibility even though it was the other persons fault. Unfortunately FHA loan requirements did not let him qualify for an FHA loan.
This is how I was able to start building my credit. The first loan I ever got was with my local credit union and my brother co-signed on a used car loan for me. The credit union had a program that allowed me to refinance the car into my name only (removing my brother from liability) once I had made six on-time payments.
Department Store and Gas Cards- So, what do you do if you aren’t in college and you don’t have a reliable person that is close enough to you to add you as a joint account holder or to act as a co-signer? Try applying for a department store card or a gas card. It is much easier to get a department store card than it is to get a card from a major provider such as Visa or MasterCard. However, I recommend that you keep a minimum balance (not a 0 balance, you need to create payment history) on these types of cards because their interest rates are very high. Don’t be surprised if they reach up to 21% to 33%. It is also fairly easy to get a gas card, such as Texaco, ExxonMobil, etc. Just make sure that they report your payment history to any of the major credit bureaus. If not, then it isn’t serving its purpose and you will just be paying high interest.
Be prudent and stick to a credit building plan. Just because a company will approve you doesn’t mean that you should approve them. You don’t need to have a large number of credit card accounts. In fact, it could actually hurt you to have too many. Too many inquiries and too many new accounts in a short period of time can drop your credit score. Don’t use over 30% of your credit limit on any one card if you want the best credit-building results and never miss payments.
Secured Credit Cards. Another way to start building your credit history is by obtaining a secured credit card. A secured credit card is a type of credit card secured by a deposit account that you place with the card issuer. Don’t assume that your payments can be taken out of your deposit. You are still expected to make regular payments, as with a regular credit card, but should you default on a payment, the card issuer has the option of recovering losses out of the deposit.
The advantage of the secured card when you are trying to establish your credit history is that many offer approval with no credit check and most companies report regularly to the major credit bureaus. This allows for building of positive credit history. With that being said, it is critical that you ensure that the issuer of the secured credit card that you select reports to the major credit bureaus.
Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards. Even knowing this, you must use caution when choosing your credit card issuer because many charge egregiously high application fees and annual fees. Further, if you make your payment after the payment grace period, they may charge extremely high penalizing interest rates. So, do your homework in advance. As I recommended before, start with your local community bank or credit union.
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