Whether you are establishing credit for the first time or re-establishing after a bad history, you will face many of the same dilemmas... you need history before you can get credit but can't establish history without having credit. This article resolves which comes first, the credit or the egg.
Financial institutions pay a credit bureau to compile information about consumers. These reports are similar to high school and college grade transcripts--instead of collecting grades, credit bureaus collect credit information. There are three credit bureaus that compile information about your credit history. They are Equifax, TRW and Trans Union.
In order to get credit, you must show a number of stabilizing attributes. Most notably, your report must prove to the lender that he will get his money back. Without a history to prove this, however, you still have a few options at your disposal.
CO-SIGN
One way is to piggy-back onto someone who already has a good credit history established and is willing to co-sign. If you are fortunate enough to know of such a person, you are not only well on your way to establishing credit, but you are very fortunate indeed. But be aware that any default of credit on your part affects the credit of the co-signer. People who care enough about you to co-sign, do not deserve a bad credit incident through no fault of their own.
Once the co-signing has occurred, you simply make payments on or before the due date. In time you will have established a credit history. If you want to accelerate the issue, payoff the debt in full when the first bill arrives but not before. Completion of the full billing cycle is important for a "pays on time" report card to be established.
This will not only make your creditor happy but your co-signer as well. The next step is to ask the co-signer to repeat his generosity (if necessary). Then: create a debt, wait until the first bill comes, pay it off in full. Keep repeating until you no longer need the co-signor. Credit history is now established.
SECURED CREDIT CARD
Another method to establish credit history is through a "secured credit card". With this method you open a savings account with someone who offering this type of card. Once the savings account is established (sometimes with as low as $100.00), you are issued a normal credit card which can be used up to the amount you have in the savings account.
Be aware that interest is charged just as with any other card even though return payment is actually guaranteed to the lender through your savings. Now, follow the pattern I suggested in "co-signer" above:
1. Create a debt on the new card.
2. Wait until the first bill comes.
3. Pay the bill off in full or make payments until paid off.
4. Repeat until you can establish unsecured credit.
DEPARTMENT AND GASOLINE CREDIT CARDS
Since gasoline credit cards are not revolving (cannot carry a balance forward month-to-month), often they are easier to obtain than regular credit cards. Similarly, some department stores offer revolving credit for a specific purchase and this is sometimes easier to establish. It is also a great way to establish credit.
But a word of warning. Every time you apply for credit, you get a check mark. Too many check marks in a short period of time and you are declined for credit, "Excessive Inquires". It's an additional "catch 22" that usually will not catch you, but it is far from uncommon.
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