Building your credit is an important part of gaining financial independence as an adult. Without a solid credit history, it is hard to qualify for low rates on a home mortgage or auto loan.
One of the best ways to build credit as a young person is to open a credit card account, charge a modest amount every month and then pay the bill in full (and on time!) every time it comes due. However, this presents a kind of chicken-and-egg conundrum: how do you qualify for a credit card when you don’t have any credit in the first place? Can applying and being turned down hurt you even further?
If you’re considering applying for your first credit card, there are a few things you need to know:
- Credit begins with you: Your credit history starts getting recorded as soon as you initiate a relationship with a lender. So, getting unsolicited credit card offers in the mail doesn’t count, but applying for a credit card, overdraft protection or student loan does.
- There are three major credit reporting agencies: They are called TransUnion, Experian and Equifax. Each one follows a slightly different reporting formula. Thus, it is important to check your credit reports from all three agencies on a regular basis.
- Applying for a card affects your credit rating: Every time you apply for credit, the lender does a “hard pull” of your credit report to see if you qualify. These inquiries go on your credit report for two years and can cause your scores to drop slightly. This isn’t necessarily a reason to avoid applying, but having several hard pulls in a short amount of time can generate a negative impression to lenders.
- You have options: Most people who are new to the world of credit aren’t going to get the best available rates. Still, there are options. Some lenders offer low-limit higher-interest cards to new lenders. By establishing a good history, you can earn better terms over time. For other new borrowers, a secured credit card may present a better option. It’s always a good idea to evaluate all your options and choose the one that is best for you.
Of course, the most important thing is to be responsible with your credit card. If you treat it like a financial tool – and not like free money – you will be well on your way to good credit.
Source: CreditCards.com, “New immigrant credit rules of the road,” Erica Sandberg, Sept. 5, 2012.
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