Obtaining Credit
If you don’t have credit you may be wondering, “How can I obtain credit?” Being able to start a credit history is a Catch-22 in the sense that in order to get credit, you usually have to have good credit standing. It is nearly impossible for an individual to apply for a loan if they do not have some sort of credit history. Since that is the case, one has to start on a small scale.
If a person has virtually no credit history whatsoever, the best way to start establishing credit is by applying for a credit card. Usually, introductory cards have low maximum limits ($500 or less) in order to establish the customer’s creditworthiness while minimizing the credit card company’s risk. The customer needs to make sure that purchases are made on the card and paid in a timely manner. If that happens, a credit foundation will be put into place for that individual.
Once a good, albeit small, credit foundation is setup, then one can apply for more credit cards to help improve the score even more. Once a consumer shows significant enough breadth and depth on his or her credit report then it will be easier to get into a rental property, be approved for insurance or be approved for a loan.
When establishing credit for the first time, knowing the difference between an unsecured credit card and a secured credit card can come in handy. An unsecured credit card is what we normally think of when dealing with credit cards. Credit card companies set an individual a maximum limit which they can borrow on the card and the person cannot exceed that limit with the purchases that they make. As they establish a history of paying bills on time, the credit grantor will usually raise the maximum loan amount and may even lower the interest rate.
A secured credit card operates in a different fashion and is a good tool to use in beginning a credit history if one cannot obtain an unsecured card. Secured cards are backed by collateral as security against nonpayment. These cards are usually opened through a bank where an individual deposits a sum of money (the collateral) which backs the card. The card is then used as any normal credit card, with the limit on the card being at least as great as the sum of the money deposited to secure the account. Sometimes the bank allows the cardholder to have a limit greater than the amount of money that was deposited, but usually no more than twice the value of the sum deposited into the account. If the individual shows responsibility and timeliness with the use and repayment of debts on the secured cards, obtaining an unsecured card will be a much easier task.
