Starting a credit history amid an economic crisis: 7 tips
Securing first-time credit today requires creativity, new strategies
In years past, a financial rite of passage for college students and young adults was to apply for a credit card and start to build a credit history. But in today's rocky economy, those who seek credit for the first time are forced to think more creatively as lenders are becoming less liberal with issuing credit to riskier applicants.
"Right now, there is a lot going on in the credit card industry," says Tanisha Warner, spokeswoman for Houston-based Consumer Credit Counseling Services. "Establishing a good credit history is important, but it is important for people to understand that things are different now and it might be a little harder to get traditional credit so they'll have to go to explore some nontraditional routes."
One reason credit card companies are thinking twice before issuing credit is the rising number of defaults. Fitch Ratings' Credit Card Index reports that late payments on credit cards topped record levels in January and defaults nearly reached an all-time high. The number of delinquencies among retail card users is also growing: Fitch's Retail Card Chargeoff Index is 44 percent higher than it was a year ago.
Advice turned upside down
"One of the tips we typically give for someone trying to establish credit is to start with a store credit card or a gas card because they're usually easier to obtain," says Gail Cunningham, vice president of the National Foundation for Consumer Credit. But that advice may no longer suffice. "Since those card issuers are struggling with the default rate of their existing customer base, it's going to be more difficult to get one of those cards for somebody starting out with no proven credit history."
Another reason first-time credit is more difficult to get is because income from a steady job is one of the factors credit card issuers consider when determining creditworthiness. With the unemployment rate exceeding 8 percent, "many people are becoming career students because there are no jobs out there, which makes it even harder to get credit," says Peter Dunn, author of "What Your Dad Never Taught You About Budgeting."
Since those card issuers are struggling with the default rate of their existing customer base, it's going to be more difficult to get one of those cards for somebody starting out with no proven credit history.
|-- Gail Cunningham
Despite the difficulties some first-time credit applicants may run into, it's not necessary to wait on the sidelines with no credit history until the economy improves. In fact, doing so could have broad, negative implications. "When you're in your 30s and you go to get that mortgage, the longer credit history you have the better," says Dunn. A limited credit history can also prohibit someone from renting an apartment, securing a car loan or even getting a job.
7 tips for first-time credit seekers
While it may require more time and effort to prove that you will use credit responsibly, here are seven ways to get your foot in the door and start building your financial future:
- Explore banking relationships. A credit card issuer may be more likely to extend credit to someone with a limited credit history if it has done business with that person before. "Maybe someone's parents helped them get a checking account when they were 16 years old with a local bank," says Dunn. "That doesn't exactly build your credit, but what it allows you to do is build a relationship with a bank so the bank is more likely to approve you when you go to apply for a credit card." When approaching a local bank, also consider applying for small signature loans, advises Warner, since credit scores are influenced by a mix of different types of credit.
- Get a secured credit card. Eliminate the risk for credit card issuers by using your own money as collateral. With a secured credit card, the amount of money you put up becomes your credit line. "It looks like every other credit card, so no one's going to know it's a secured card," says Cunningham. But the beauty of using the cards and making on-time payments is that some credit card issuers will report those payments to the credit bureaus, raising your credit score over time. In fact, as you build your credit profile, many secured card issuers will raise your credit limit to a level that's higher than the amount you put up as collateral.
- Look for special programs. Some credit card issuers have programs designed specifically for those who are trying to build credit. For example, Wells Fargo's College Visa Card is geared toward students at two- or four-year accredited colleges and is designed for them to establish their credit history in school. "The average credit line is $875 -- it's not extremely high," says Dinna Martinez, product manager for Wells Fargo's secured and college segment. "But it's enough to get them started."
- Consider less-than-stellar terms. Unfortunately, the current economic climate dictates that some people consider options they wouldn't think twice about in different times. For some, the only credit option available may be a credit card with an annual fee or a high interest rate. An annual fee may be worth the cost if it helps you build your credit score so you qualify for better offers in the future. Likewise, the interest rate won't matter if you don't carry a balance. To make such a card work for you, "you have to be sure you're disciplined enough to make the payments in full every single month," says Warner.
- Take advantage of college offers. While there have been efforts to restrict credit card companies' ability to market their cards on college campuses in such states as New Jersey and Oklahoma, it might make sense to consider one of these offers in light of the difficulties many are facing when applying for credit. However, make sure you understand the terms and read the fine print, Warner advises, and again, pay the balance off each month.
- Look to mom and dad. Many young people get their financial start by getting help from their parents. However, even that option may be hindered if your parents are financially strapped because of the credit crisis, Dunn points out. But if they are willing and able, they can co-sign on a loan, of their credit cards, to help you build your own credit profile.
- Avoid applying too often. If you're turned down for credit the first time, you're liable to keep applying until you get a "yes," but that can be a mistake, says Cunningham, since too many inquiries can negatively impact the score you're trying to build. "If you tried for one general purpose card -- Visa or MasterCard -- one gas card, and one store card and got turned down by all three, you need to sit tight," Cunningham says. Wait about six months, then try again, she advises.
Once you open your first credit account, plan to be a customer for the long haul. "The first card you ever open you will never close," says Dunn. "Because that's what will give you the longest credit history, which will help your score the most."
See related: Piggybacking: When should the free credit ride end, 6 tips for college students considering first credit card, 10 ways students can build new credit, Top 10 ways students ruin their credit, Do your homework when shopping for your first credit card, 7 tips for handling your first credit card
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