Having no credit history limits you because it makes you a kind of non-person in the world of credit, and that makes it difficult to borrow money for a car, credit card, a home, or for another good purpose like starting a business. No credit history is often considered better than a poor credit history. However, this has changed over the past few years and no credit history is now often no better than a poor credit history.
Without a credit history, a potential borrower seeking a loan or new credit card has no credit score or profile for the lender to automatically review. And this is the heart of the problem. Bank credit card issuers, mortgage lenders and most banks now utilize automated underwriting or loan approval models. A consumer without a credit history and credit score can not be evaluated by a computer model and is more often than not denied credit rather than approved.
For consumers who do not yet have credit, the first steps should involve working on general financial issue. First, be sure to obtain a bank account. Your bank account balance or transaction history doesn’t go into your credit report, but any application for credit including a credit card application will ask you for bank account information. Not having a bank account will not necessarily lead to the credit card application being denied or a car loan denial. But, not having a bank account will certainly increase the chances of being denied and may very well impact the interest rate on the terms of borrowing. Credit card companies prefer to review and applicant with a bank account in order to approve the best credit card rate.
If you already have an account at a bank, that’s great. If you don’t have one and really want to work on building credit, see if you qualify to open an account at a credit union or your local bank. These financial institutions typically have a more personal approach than a big regional bank or national bank and they often have more of an interest in educating you about maintaining good credit.
Next, you should apply for a credit card. To avoid being denied the credit card, which will indeed establish credit for you – of a negative kind – apply only for a credit card that is likely to accept you. You may be able to do this at a bank or a credit union where a personal banker will show you which product is right for you. On the other hand, you may find the best credit card online that suits your needs. Get some guidance from a bank or a web site that evaluates and compares credit cards. The credit card companies themselves aren’t entirely reliable when it comes to full disclosure about your likelihood of acceptance or the costs and benefits of the credit card services. They are working for their own benefit first and yours second.
Now comes the important part.
Once you have a credit card it is important to use it wisely. Here are the things to remember about credit card use.
Don’t fall into the trap of thinking of a credit card as money to spend. It isn’t your money and you have to pay it back. A credit card is a convenience and a tool. It makes things easier and it allows you to do things like online purchasing that you would otherwise struggle to do. Making purchases with a credit card online is just the beginning; a good credit card history lays the ground work for access to additional credit. Credit that doesn’t have to be used but is available when the opportunity arises.
Use the credit card. Be prudent, but you only establish credit when you actually use the credit card to make purchases. The important thing about using the credit card is to know when to stop. One thing that lenders look for in credit card use is how much of your available credit card balance on the card is gone. The rule of thumb is to use only a third of your available credit or credit card limit. So, if you have a credit card limit of $3000, try not to exceed a credit card balance of $1000. This kind of care demonstrates creditworthiness. Ah, creditworthy! That’s how you want lenders to think of you. If you are creditworthy you’ll eventually be able to borrow much more than that $1000 with which you begin.
Most importantly, pay on time. Let’s put that in capital letters. PAY ON TIME. Nothing damages your credit more than late or missing payments. We cannot stress this concept enough; make the credit card payments on time. Pay on time.
A corollary to this concept is to pay most of the full credit card balance each month if you can. This has two benefits. One, it shows lenders that you are serious about your credit. Two, it helps you to avoid credit card finance charges. This is an important concept that is especially important when you first get your new credit card. Eventually you will have a major expense that may be unexpected and you will not be able to pay off the entire amount at once. That’s part of the convenience of having the credit card, and it’s another good reason to keep a lower balance.
If you are denied credit, don’t just walk away. Find out why. Reasons may include income, employment or credit history. If you are denied credit, you can request a free copy of your credit report to see if there is erroneous data on it, and have corrections made. All of this is important information that will help you to understand your credit situation and help you build a strong credit foundation for the future.
Credit is important, a credit history is more important. Whether you want or need credit now, access to credit is an important facet to financial independence. A good credit history will facilitate access to big ticket items like a home mortgage or even better credit terms or a better credit card rate.
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