Most Americans wonder why they get denied when they submit their first credit application if they do not owe money to no financial institution. Would you be able to lend me ten thousand dollars without knowing me? No, right? That is why financial institutions have to use credit reports to evaluate customer’s credit behaviors.
Credit score is influenced by four factors: history of payments, length of accounts in good standing, inquiries, and types of accounts.
It is difficult to obtain history, length with accounts, or types of accounts when you do not have any kind of previous history. Most credit agencies will turn you down or denied your application because they do not know you. To start building a good credit score, you must establish a secured account. Some institutions call it “secure credit cards” or “secured loans.” Secure products will help you generate history with a credit institution with a low-cost and without risk of generating unnecessary debt. A secured account starts by initiating a savings account which will be taken “hostage” by the financial institution in case you do not repay the loan they will give you for the same amount on the savings account. This way, creditors will be more likely to give you an account regardless of your past history or credit scoring. This product works perfect for college students who want to establish a positive history and get denied for not having any yet. There might not be a need to borrow against the secured line of credit, but it is necessary to borrow and pay every month, so the creditors will report your good behavior to the credit reporting agencies.
Once you have generated a few months of good history (usually 6 months), apply for second secured line of credit to create two trades in your credit history. Please do not inquire more credit on your behalf, so you can start building up positive accounts. If you inquire too much, creditors will think you are desperate for credit and will not look good on your report. Remember the number of inquiries can affect negatively your score.
Then, apply for a small credit card preferably with the same institution. Chances are the credit institution could see your good behavior with credit and usage of secure loans and payments impacted positive on your credit score which enables you to a positive number. After the approval of the credit card, try to keep your credit card and secure loans with less than 30% of usage monthly and pay them ALWAYS on time and in full. Creditors like to see payments in full monthly because it shows your positive cash flow and not credit abuse.
Finally, keep just a couple of secured lines and a couple of credit cards to show at all times your wise use of credit. Most wealthy people do not need credit because they have the funds to pay for their daily expenses, but they use credit cards just to show their good behavior and control of credit. Most of them, charge the card and pay them all the balance at the end of the cycle to generate rewards, cash backs, miles, or other perks financial institutions offer for the user’s benefit. The key is to pay all the balance off at the end of the month to avoid interest for purchases which can lead you serious financial problems.
If you follow these steps to either generate credit or keep your current one, the time you really need to borrow for something important, you will have the credit score necessary to prove you can behave correctly with credit.