Building Credit for the First Time

We’ve had a few customers lately who have taken advantage of the First Time Borrower program offered by one of the credit unions, so this week we thought it would be appropriate to share a Q&A from Steve Bucci, president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies, on the smart way to build credit for the first time.

Q: I am a recent college graduate and I am beginning to understand how important credit is since I have left school. I have never needed to borrow money or take loans out for school and only recently opened a bank account. I would like to build my credit history and open some credit cards (unsecured). Can you give me a blueprint for building my credit quickly and to a level where I
can open some credit cards and lease a car? Thanks in advance.

A: Although it is great that you have graduated from college without any debt, the downside, as you have found out, is that you have not established credit. The good news is that it is much easier to establish credit than it is to pay off the thousands of dollars in debt with which many college students will graduate.

Below is a blueprint for establishing credit and using it wisely.

  • Open a bank account. This will not appear on your credit report, but bank account numbers are often requested on credit applications.
  • Apply for a credit card. To avoid being denied credit, apply only for those cards whose requirements you are likely to meet. Department store or gas credit cards are usually easier to obtain than a bank-issued card with a Visa or MasterCard logo. Before applying, make sure the creditor reports account activity to the credit bureaus. As the purpose of obtaining the card is to establish credit, you want to choose a card that will help you do that. If you want to get a Visa or MasterCard, ask at the bank or credit union at which you have your account.
  • Charge purchases and make payments on time. Use your credit card for purchases and make sure to pay the balance on time. Once you have used the card responsibly for three months, you may want to apply for a Visa, MasterCard, American Express or Discover. These cards will allow you more flexibility in charging purchases, but will also give you more opportunity to get in trouble. Remember a $5,000 credit limit is not $5,000 in additional income. It is only a different way to spend the money you already have.
  • Create a spending plan. Before you use your credit card, you will want to make sure that you are able to pay off the balance on the items you plan to purchase. Write down all of your expenses and your income and adjust your spending accordingly.
  • A secured card is an option. If you have trouble qualifying for a credit card, you may opt to apply for a secured card. These cards have credit limits based on a required deposit made by you into a savings account. You use the card just as you would any other credit card.
  • If denied credit, ask why. Ask any creditor that denies you credit to give you the reasons you were denied. Reasons may include income, employment or credit history. It is important to find out why you are denied because frequent inquiries (applying for credit) on your credit report can be viewed as a negative to a potential creditor. 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. (If you need help fixing errors on your credit report, check out last week’s blog.)

Just as important as a blueprint for establishing credit, we need to go over some of the things you don’t want to do.

  • Don’t overdraw your bank account. You will be charged fees and you could damage a good reference.
  • Avoid missed or late payments to any creditor. That is a sure way to damage your credit rating.
  • Don’t let anyone else borrow your credit card, debit card or in any way have access to your bank account. You are responsible for any authorized use of your accounts.
  • Don’t give your card number to anyone over the phone or Internet unless you have initiated the transaction.

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