Trying to get a good credit card without already having good credit history may seem like an impossible dilemma. You can’t get credit without credit experience, but you can’t establish credit experience unless someone gives you credit!
Because of this frustrating situation, some people have trouble getting credit cards because of their limited or negative credit history. But there are ways around it, if you know how the system works. “How do I establish credit?” you may ask. Well, it can be done, and it’s not too hard. On the matter of credit cards, the type you try to get depends on your situation. There are student credit cards, credit cards for people with no credit, and cards for people with bad credit. If you’re just starting, you might need to get a secured card or one with a co-signer.
A secured credit card works like this. You pay money up front, usually equal to your credit line on the card. That means the card is “secured”: Even if you fail to pay your monthly bill, the lender hasn’t lost anything, because you prepaid up front. That sounds a lot like a debit card, and of course it is. It’s your own money you’re spending. The advantage is using the secured credit card to establish credit history. You send a message that you’re reliable and responsible, and it improves your credit score. Most people are more familiar with unsecured credit cards. That’s what most people have, a regular Visa or MasterCard where you borrow money and have to pay it back. But the unsecured kind can be very helpful if you’re just starting to establish good credit history.
Another option is getting an unsecured card with a co-signer. In this case, the co-signer assumes responsibility for your debts, in the event that you fail to pay them. When someone defaults on a loan, the co-signer is almost always forced to pay back whatever was owed — so your co-signer will need to be someone who trusts you! If you fail to fulfill your obligation, he or she will be on the hook for everything you borrowed. All of these options — secured cards, pre-paid cards, co-signed cards — are perfectly good choices, and they can help you get started. But eventually, you want to get a regular credit card by yourself.
To begin with, you must comprehend how lenders decide who gets credit and who doesn’t. Various loan centers have various criteria, but it basically boils down to the 3 C’s: capacity, character, and collateral. What is your ability to pay based on your current debts and your income? What assets do you have that could be used as collateral if you defaulted? What is your payment history like, how long have you been employed, and are there any outstanding judgments against you? To see how potential lenders will look at you, request a copy of your credit report and score from the credit bureaus. There are three of them, Equifax, Experian, and TransUnion. These organizations get information on your payment history straight from the people you do business with, along with government agencies and the courts (if you had a bankruptcy, for example).
How do they calculate credit scores? Their formulas are closely guarded secrets, but they come up with scores between about 350 and 850. What is considered a good credit score? At least 620 will get you credit; if it’s 720 or better, you’ll get the best interest rates. Your credit score is calculated based on your history in the last two years: have you paid on time, have you been current, have you defaulted on anything, and so forth. How often you apply for new credit cards is factored in, too.
At least once a year, you should get a copy of your credit report and score from the credit bureaus and scour it for mistakes. If you find anything that’s wrong, out-of-date, or misleading, make a note of it. Be particularly sure that your name, street address, telephone number, and other basic information is accurate.
The Fair Credit Reporting Act guarantees you certain rights. You’re allowed a free copy of your credit report if you’ve been turned down for credit, for example, as long as you request it within 60 days. If you’re unemployed and looking for work, you can also get a free copy. What’s more, if you’ve been the victim of credit card fraud, you get a free copy of your credit report.
If there are mistakes on your credit file, you can get assistance from credit counseling agencies, or you can fix it on your own. The credit bureaus are required to investigate any claims you make, so there’s really no reason to pay someone to deal with the credit bureaus for you.
There is no fee to argue against mistakes or inaccurate info on your report. Just tell the credit bureau you need a dispute form.
After your credit report has been scrubbed squeaky clean and is entirely accurate, you can apply for credit confidently. Once you’ve gotten a card, handle it wisely and rationally, and establish good credit history.
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