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*Last updated December 2014
My application was rejected the first time I applied for a credit card, despite the fact that I had a steady job, solid income, and not a penny of debt. The bank explained that I didn’t have enough credit history. I had already been working for at least 10 years, because I began supporting myself at 16 years old. The problem, they said, was that I never borrowed money or carried any debt. Needless to say, I was pretty disappointed. Then I tried again, requesting an American Express card. Back then those were harder to qualify for, so it was a rather ambitious move on my part. After waiting by the mailbox for a few weeks I became impatient and called Amex.
“Did I get approved?” I asked.
“No. Sorry. You don’t have enough credit history.”
An hour later the mail carrier arrived with a thick envelope from American Express. Inside was a brand new credit card in my name. Apparently the computer software at Amex had made a mistake and authorized it against their wishes. I went to the nearest store, grabbed something cheap off the shelf, and tried to pay for it with the shiny new plastic. Sure enough, the transaction was approved.
“Does that mean my card works?” I asked the cashier.
“Of course,” she said, looking at me like I was from outer space.
From Rejection to Courtship
Since it was so hard to secure a credit card and wasn’t supposed to have one according to the people who checked my application at Amex, I deliberately started using it in a very intentional, strategic way. I’d charge things instead of paying cash to develop a track record of credit history and then I’d pay off the balance in a timely fashion. After a year of carrying the plastic, I received a new Amex Gold card in the mail. Soon I was carrying their high-end Platinum card and every card company under the sun was sending me unsolicited credit card offers, courting my business.
You Have to Start Somewhere
Until you borrow money from a lender who reports to the major credit agencies, you may not even have a credit score. You’ll be under the credit agency radar. That’s a quandary, but if you have a checking account your bank may be able to help. Banks will usually offer you a secured line of credit. They set it up to take money from your checking account in the event you fail to repay the borrowed money, i.e., the balance on your secured card. Establish a relationship with a bank and then discuss your options with a loan officer. They can map out a plan for you to create a solid credit history, starting with a small loan “secured” by cash or other valuable collateral. Become familiar with exactly how your credit score is determined so you are armed with the right information to make good credit building decisions.
To move up the credit food chain you will want to eventually qualify for a loan that is unsecured or not backed by assets. Repaying that kind of loan proves that you are more responsible and can manage your repayments without creating a risk to the lender. The easiest unsecured loans are usually department store charge cards or gas station cards. You can’t use them everywhere like a regular Visa or MasterCard, for example, but if you make a few purchases and pay them back on time, that will establishes your track record. Just make sure that the store sends reports to the “big 3” credit reporting agencies, otherwise the strategy will be for nothing.
Revolving credit is the goal. That means that you are given a spending limit. You can make purchases up to that limit. Once you’re met the limit you cannot borrow any more until you repay your current outstanding charges. If your credit limit is $1,000, for instance, and you charge $400 worth of purchases your credit drops to $600. Send in a payment of $300 and your credit limit goes back up to $900. Repay the whole $400 balance and your entire $1,000 limit is restored. Credit cards are the classic example of revolving credit, and as your credit profile improves banks will raise your limits – trusting you with more credit.
Start Small and Grow Your Credit History
So start small and work your way up gradually. A great strategy is to impose a limit of 30% of your available credit on yourself. If your credit limit is $1,000, for instance, only use $300 of it before paying it all back. That looks great on a credit report. Use your credit wisely and soon you’ll have a new problem on your hands. You’ll be offered lots of credit but will need to exercise enough financial discipline to refuse the credit cards you do not need.
Along the way remember to check your credit profile, which you can do free of charge once a year. Inside you’ll see what banks and other lenders are saying about you. That’s how to keep tabs on your credit history and watch it grow and strengthen over time.