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Establishing Credit For The First Time
Establishing credit now will serve you well in the future since your credit rating has a tremendous impact on your buying power. Although saving your money and making cash purchases demonstrates responsible debt management skills, lenders have no way of verifying your spending habits without a credit report to examine. Mortgage lenders, credit card companies, insurance providers and even some employers will all want to review your credit report. While credit checks are standard procedure in the financial world, they pose a considerable problem if you lack a credit history.
Apply for a Secured Credit Card
Secured credit card providers may attempt to pull your credit, but lack of a credit history won't exclude you from approval. Rather, secured credit card companies will require that you provide a cash deposit which will then be used to determine your spending limit. Make periodic purchases on the card to keep your account active, but keep your balance low to ensure that your credit score improves rather than dwindles.
When shopping for a secured card, watch out for high fees and companies that don't report accounts to the credit bureaus. Accounts that don't get reported to the credit bureaus won't appear on your credit report and can't help you build your credit score.
Provide Collateral for a Bank Loan
If you have a checking or savings account, talk to your bank about giving you a personal loan for the sole purpose of helping you build a credit history. Although you can do this at any bank, your own bank can review your spending habits through bank records.
The tricky part for some borrowers is coming up with collateral. Without a credit history to go on, you'll need to provide the bank with something of value to secure your loan. If, for example, you have $5,000 in savings, you can allow the bank to place a hold on your funds and lend you the same amount, which you can then pay over time in order to build a good credit history. Keep in mind that, even with collateral, a history of overdrawing your bank accounts and running up fees will likely prevent you from qualifying for a personal loan.
If you lack a significant amount of savings but have a steady income, a co-signer can help you get approved for the loan. A co-signer can be anyone with a good credit history and regular income. Once approved, the loan will appear on both your credit report and the credit report of your co-signer. Thus, its imperative that you make your payments on time. A derogatory notation on the account won't just damage your own credit score, it will damage the credit of your co-signer as well.
Once creditors report accounts to the credit bureaus, the information for those accounts will remain within your credit record for a minimum of seven years. Because of this, its vital that you educate yourself about debt and credit scoring before you begin building your new credit history.