Which came first, the chicken or the egg?
We’ve all heard it before, the old “chicken or egg” question now let’s apply it to a real life scenario. You apply for a job and they’d like you to have more experience yet you need the job to get the experience. Sound familiar? The same applies to your personal credit situation. You need to establish credit so that you can build your credit history for future purchases including a car, home etc. However, when you apply for credit without any prior history, it can oftentimes be difficult to obtain. Chicken and egg.
Using Credit Cards
Believe it or not, it may seem like a great idea to use cash for all your purchases but it will come back to hurt you in the end when you are trying to make one of the purchases mentioned above – unless of course, you are using cash for that too which is unlikely. Establishing credit and using it wisely is what you want to do but the first thing you need to do is find an institution that will issue you credit so you can get started.
Establishing Credit with a Secured Card
For those working on establishing credit, a secured credit card is usually the easiest type of credit to get. It requires you to make a cash deposit that the creditor can keep if you do not make your payments. (You will get the deposit back otherwise.) The credit limit is often low, and the interest can be high, but you may be able to convert it to a regular credit card after a year or two of on-time payments. You want to make sure that the creditor reports your account to the credit bureaus – if they don’t, you won’t be establishing credit and a credit history.
Getting a cosigner
Another strategy for establishing credit is to have someone with a good credit score cosign an account for you. This requires a great deal of trust on the part of the cosigner – if you fail to pay, he or she will be held responsible for the full balance. If you are under the age of 21 and are applying for a credit card, you have no choice but to obtain an application that contains the signature of a parent, guardian, or other individual 21 years of age or older who will take responsibility of the debt or proof that you have independent means of repaying any credit extended. Gone are the days of applying for a credit card on a college campus to get a free t-shirt without having verifiable income. That’s how I got my first credit card and got started on establishing credit.
A safe bet is to apply for a secured credit card, use it a couple times a month for purchases where you’d normally pay cash and then pay it off at the end of the month. You aren’t racking up debt but you are building credit.
For more information on secured credit and establishing credit, visit us at riverset.com or call 412.488.2525.Riverset Credit Union is open to those in Allegheny, Beaver and Butler Counties.