This week we have been talking about establishing credit. Obtaining your first credit card or loan is challenging. Lenders require a credit history, but are reluctant to help you establish one. It really is a catch 22. Tuesday we discussed four factors that lenders consider when offering credit. These are employment history, residence history, bank accounts, and utility accounts. These factors can show stability, which is important to a lender.
If I need to establish credit for the first time, I should start with my bank. Having a checking and savings account at the same bank hopefully shows you can manage money responsibly. Also, building a relationship at a bank may carry some weight when they’re deciding whether to offer me credit. I would also look to a department store. They offer discounts on purchases when you apply for a credit card. While I never recommend constantly applying for cards to receive a discount, it is worth it to apply one time and see if you the store will issue you a credit card.
If you are fortunate enough to obtain a card, be careful. It may feel like free money when you first get it. In a way, it is free. At least until the billing cycle begins. Then, the money you borrowed on that card will probably become the most expensive loan you have ever received. Lenders look at how much credit you use. If your credit limit is $500 and your balance is over $450, your credit score will be negatively impacted. Having a credit card constantly maxed out shows a lack of fiscal discipline. So lenders may be apprehensive about offering more credit.
What if someone was turned down by their bank and a department store? Where can you receive a credit card? We will discuss that tomorrow.
If you have a financial question for Ross, you can use the Marino on Money page.