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Establishing Credit
by John M. Roberts

When you first apply for credit, whether it's for a credit card, purchasing a big ticket item, a home, a car, etc., you may be surprised to find that establishing credit may not be as easy as you might think. Many companies will not approve you for a loan, credit card, or other purchases unless you have established credit elsewhere.

You may think that having no credit at all makes you look good to creditors, but it doesn't. Many potential creditors are wary about issuing credit cards or giving loans to people who have no bill paying track record. When they look at your credit report and there is no established credit, a red flag goes up. They ask themselves how they can be sure that you will make your payments on time or repay the debt at all.

There is always risks involved in granting credit. You may think businesses that lend money or issue credit are capable of taking on such risks, and many are, but just like any other business, they want to make sure that the money they loan is going to be repaid. If they don't look out for their best interests by looking at a creditors ability to repay a debt, they become susceptible to failure.

So what do you do to establish credit?

  • Bank Accounts: First, you should open a bank account and keep it in good standing, meaning no overdrafts, no bounced checks, and keeping the required minimum balance in it. Managing a bank account shows that you are capable of handling your money. Although a bank account isn't reported to the credit bureaus, it does have an impact on lenders when they consider giving loans or credit cards. The fact that you already have an existing account may be an important factor in getting approved for a credit card or a loan from your personal bank.
  • Employment History and Stability: Employment history is very important when applying for credit. A steady job carries a lot of weight and this is what most creditors look at more than anything else. If there are periods of unemployment, you will need a good explanation for them.
  • Residence Stability: Many creditors will actually look very hard at how many times, you have moved in recent history. If you move a lot, it shows that you may not be a stable person. This fact may have a lot of bearing on whether a lender or other creditor will give you a loan or extend other credit to you.
  • Utilities: By having utility bills in your name and keeping them up to date, it can be give a lender something to look at when reviewing your application. How you make your payments on gas, water, electric, telephone, cable, and other bills can give a creditor an idea of how you will repay a loan or credit card. This can be very helpful if you are trying to buy your first home.
  • Secured Credit Card: A secured credit card may be good for you if you have been turned down by a bank or other company. It is much easier to get than an unsecured card because you pledge your own money. This means putting your own money into an account that is linked to a credit card. You can use the card to make purchases, but if you fail to make the correct payments, your deposit can be taken by the bank. A secured credit card can be very useful in establishing other credit if you maintain the account in good standing.
  • Something To Remember: Each time you apply for a credit card or loan, it shows on your credit report as an inquiry. This may have a negative affect on your FICO score and make it appear that you are desperate for credit.

Although people under the age of 18 can be added as a joint user of a credit card, most credit card providers and other lenders require a person to be at least 18 or older to receive credit. Current laws require that credit card applicants provide proof of income if they are under 21 or they must have a co-signer to receive a card.

Establishing credit can be difficult but it is not impossible to do. The main thing to remember about establishing credit is not to get in over your head. Make sensible choices when applying because once your start getting credit, credit cards, and loans, they will become easier to get and then it becomes easier to get behind on payments, thereby ruining the good credit you sought to establish.


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