“I’d like to purchase a mobile phone,” I told the guy at the store. He had me fill an application, and after a few minutes, came back to me and said, “I’m sorry, we can’t give you a contract. You don’t have any credit history.”
I arrived at the US in 1999 with no credit history. I quickly learned that without established credit, your options are very limited. You can’t get a credit card, you can’t get a cell phone, and you certainly can’t get a car loan or a mortgage.
But if you can’t get a credit card, how can you start building a credit history? It’s a catch-22, for sure, but as I’ve learned from personal experience, there ARE ways to make it happen. My advice applies to anyone that arrives in the US from another country. It also applies to high school graduates embarking on their own lives as adults, and to anyone who needs to build or improve their credit.
What is Credit History?
Your credit history or credit report is simply a record of your past borrowing and repaying activities, including information about late payments and bankruptcy. It enables lenders to decide if you are “safe” to lend to. It’s basically an assessment of your ability to repay a loan.
Why Do I Need a Credit History?
Commenter KM said it quite eloquently in this post on the value of saving: “Sadly, you are punished for living within your means and not borrowing. When I tried to extend my Line of Credit at the bank, they said that although my credit score is 800+, I needed a cosigner because I had so little credit history. Their reasoning was ‘if you have never made payments for a car, how can someone trust that you will make payments on a new car?’ My answer, “Because I am actually responsible and don’t have debt” was not accepted.”
It’s true. Even if you much prefer to patiently save towards a goal instead of borrowing, you need to borrow SOMETHING. Otherwise, if and when the need arises and you need to borrow, you’ll have a hard time getting a loan, or getting a good rate on your loan.
So, how do you build a credit history if you can’t get a credit card?
Some Credit Cards Are Easier To Get
Back in April and May of 1999, getting a cell phone wasn’t the only issue. My husband and I applied for several major credit cards, and were rejected by all of them. Finally, we were able to get a low-limit credit card through the bank where we had our checking account.
Another option is to get a store card. Store credit cards tend to have low credit limits and a more lenient approval process. Use the store card to build your credit history for a few months, then apply for a major credit card.
Pay on Time!
This is obvious, I’m sure – your first and only credit card is NOT the place to mess up. Pay each statement promptly and in full. To make sure you can actually repay, don’t borrow too much – only charge on the card the amount you can actually repay, and try to keep your balance at 30% or less of your credit limit.
Open One Line of Credit at a Time
After you get that initial credit card, don’t go crazy applying for several more cards, or loans. Open just one line of credit at a time, prove that you’re a responsible borrower, and only then open another line of credit.
Check Your Credit Report Annually
Use annualcreditreport.com to check your credit report annually. You want to make sure your credit was reported by the lenders and is being recorded, and you want to make sure there are no mistakes or identity theft issues.
Keep That First Credit Card
This is the card that establishes the length of your credit history, so hold on to it, even if you’ve moved to bigger and better cards and don’t need it anymore.
Revolving Debt Only: A Bad Thing?
I’ve heard that it’s not a good thing to ONLY have credit card debt, since it’s revolving debt, so you want other types of debt too, such as a car loan, a mortgage or a student loan. In my personal experience however, we only have credit card debt, and our credit score is excellent. Since we didn’t NEED a loan, it didn’t make sense for us to borrow – and pay interest – just to build a credit history, when we can do it for free with a credit card.
It Pays to Have a Good Credit History
Once you become eligible for one of the major credit cards, get a reward, or a cash-rebate card, and you could save nicely – as long as you pay each statement on time and in full. A good credit will also help you get a better rate on a mortgage if you ever need one. As KM’s story demonstrates, even if you prefer cash to credit, building a good credit history is a worthwhile financial move.
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