Financial Planning

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How To Build Credit When You Have No Credit

For some trying to build credit when you have no credit is like answering the “what came first the chicken or the egg” question. If creditors look at past credit when granting new credit how can you build new credit when you have no credit? If you look at it logically though it’s more like trying to build a career – it takes awhile, you have to pay your dues, and you need to have a plan of attackyou need to: Order and review your free annual credit report while simultaneously adding new lines of credit.

Free Annual Credit Report: Order and Review

  • Order a copy of your credit report. By law you can order a free copy of your credit report every 12 months from  Annual Credit Report . This credit report is used by the agency to create your credit score. See Understanding credit scores for more information about them.
  • Challenge any inaccurate information on your credit report: write letters to the three credit bureaus which are TransUnion, Experian and Equifax: See How to improve your credit score for more  on how to challenge inaccuracies in your credit report:

According to the FTC this is the procedure for challenging inaccurate information you find on your credit report:

“Include copies (NOT originals) of any documents that support your position. In addition to providing your complete name and address, your letter should identify each item in your report you dispute; state the facts and the reasons you dispute the information, and ask that it be removed or corrected. You may want to enclose a copy of your report, and circle the items in question. Send your letter by certified mail, “return receipt requested,” Consumer reporting companies must investigate the items you question within 30 days — unless they consider your dispute frivolous….”

Credit Cards For People With No Credit History:

  • Unsecured cards – not from major banks: Applying  for department store credit cards, gas station cards or some unsecured “off brand” bank credit cards does carry some risk in that generally,  they lure you in with a great introductory rate , and then raise the interest rate after the initial period is over. However if you use the card steadily, never charging more than you can easily pay that month- never carry a balance, then they can be a good way to build credit.
  • Secured cards: These cards are the easiest to get because the risk to the lender is least. With a secured card either you or a co-signer (with an established credit rating) will put up an equal amount to your credit limit in a savings account. That way if you default on the payment then the card issuer can simply take the money out of the account. If you do well with secured credit over time your chances of getting unsecured credit will be more likely.
  • Unsecured cards – from major banks: These are the credit cards that you likely are familiar with – Mastercard/Visa/Discover etc. They are generally more difficult to get than department store cards but also can do more for your credit rating. Again the key to these cards is to use them lightly and steadily – never carrying a balance from month to month and never putting more than 20% of the credit limit on them.

Build credit through your relationships:

  • Banks. Open and maintain a checking and  savings account at a your local bank. It’s always a good idea when opening the accounts to introduce yourself to the banks lending officer and explain what your goals are and what (if any) your history has been up to that point. Ask them what steps you need to take to build credit.  The bank will be interested in developing a long term relationship with you and should be expected to be a helpful ally to you. If they aren’t – then shop around – perhaps the bank down the street may be more willing to discuss your goals. This isn’t to say that you will get credit instantly but establishing a professional relationship with the  bank will significantly improve your chances in getting a loan or credit card through them.
  • Employers. Naturally a lender will  want to see if you are able to hold a job or if there have been periods of unemployment. Holding a steady job in which you have progressively assumed greater responsibility – and salary – can help in the approval process.
  • Landlords. As with employment history, it is beneficial to have a stable residence in which the rent has been consistently paid on-time.
  • Installment loans: This should be a small loan with a short term period while you are still establishing credit.
  • Misc accounts. It is possible for anyone to sign up for many utilities – electric or gas bill, telephone, cable, or water service. Just as with any other bill you must consistently pay on-time.

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