Starting Credit for the First Time

Starting Credit for the First Time

Just because you leave home for the first time doesn’t mean you’re ready for total independence. Depending on how much you have paid attention to your credit score prior to making your grand exit, financial independence might be a larger issue than you expect.  If you thought credit was just about credit cards and buying a home – think again.

How Does Personal Credit Affect You?

In today’s economy, your personal credit determines what you can purchase, and how much you will pay for it. For example, your credit score can impact:

  • What apartment or home you live in
  • Your insurance rates
  • Interest rates
  • Your first job

That’s right, employers have the right to screen your credit report and score as part of the hiring process. This makes credit paramount to your financial health.


Not Having Credit Is Expensive

Without a proven track record of your creditworthiness, financial institutions will likely view you as a high-risk borrower. For that reason, you will have limited options to build your credit. Products you are eligible for will be low risk for the bank, which means you might incur:

  • Higher interest rates
  • Higher fees
  • Lower credit limits

Additionally, your credit usage habits may be closely monitored. If you appear to be racking up too many charges, your credit card provider may freeze your credit line until they can talk with you about your spending. It’s not that they don’t want your business; they just want your business under terms that are safe to them. Until predictive risk analysis becomes more accurate, this is how financial institutions test the waters and assess your risk.


How Do I Start To Build Credit?

Financial institutions typically process consumer credit applications through automated processing systems. Consumers who do not have a credit history won’t have a credit score either. Most creditors decline an applicant with no credit – which is the problem. The best strategy for you to build credit is to start small credit lines and less risky credit sources. To understand this strategy, let’s dive into the differences between secure and unsecured debt.


Secured Credit Cards

Secured credit cards, offered by almost all reputable banks and credit unions, are very popular with consumers who are building their new credit histories. Secured credit is credit backed by the consumer. In other words, the consumer makes a deposit with the creditor, who then issues a credit card with a credit limit equal to the amount deposited.

For example, if you deposit $800, then the bank will issue you a secured credit card with a credit limit of $800. This deposit is usually accompanied by monthly fees. Banks offer this type of debt because the risk is low for them – they will get their money back if you don’t pay them. Banks will usually issue secure credit cards if you have managed your bank account well – if you do not have a history of bounced checks or using check overdraft protection. As you continue to use your card and pay your balance off, your credit history will grow. Eventually, can apply for unsecured credit cards that do not require a deposit. One thing to note about secured credit is that your cash deposit is typically locked up and not accessible while you have the secured card. And unfortunately, the money often does not earn interest.


Unsecured Credit Card

Unsecured debt means that the creditor has no collateral such as a car or home backing the credit.  Lenders who issue unsecured credit take the risk that you will not pay them back for what you borrow.  Because unsecured credit is a higher risk proposal, lenders are more cautious when reviewing the applicant’s credit history. If you don’t have credit history, it may be more difficult to land an unsecured credit card.  In most cases, the easiest way to acquire an unsecured credit card, without a credit history, is through a gasoline or retail department store credit card.

Retail & Department Store Credit Cards

Retail cards are credit cards issued for use at specific retail stores such as Kohl’s, TJ Max or Target.  They can also include other services or products such as Chevron or Shell gasoline. Retail cards are generally easier to obtain, even if your credit history is completely new. Most likely, you will get a low credit limit such as $300.00. As you use the card (and make on-time payments) your lender may automatically increase the credit limit. This can happen in a matter of months.

Expect these cards to have high interest rates, which means it’s important to pay them off (entirely) each month.


Bank Debit Cards Reporting on Your Credit Report

Most debit credit cards are another form of a “secured” credit card. They are backed by the balance in your bank account. But, if your bank allows, you can use your card as either a debit or credit card. This is a great option to start building your credit history and eventually qualify for better credit options. It is possible you’ll incur extra fees for using your card in this way, so double check with your bank for exact fees and terms of use.


© 2018 IdentityIQ, LLC


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