Establishing Credit

You need to create a credit record to get a loan.

Trying to establish credit can be a real paradox; lenders want to examine your credit references to be sure you are reliable and can be counted on to repay your debts before they'll give you credit, but you can't get a credit record to examine until someone gives you a loan. Still, there are some steps you can take to begin building a credit record.

One often recommended method of obtaining a first-time loan is to establish a savings account with a bank, savings and loan or credit union in your area. You then ask this institution to provide you with a loan, and offer to let it hold the savings account as collateral. Today, many banks offer so-called "secured" MasterCard and Visa accounts which serve much the same purpose, but allow you to use your credit in stores, hotels and restaurants. These cards look exactly like other unsecured cards of the same type, so no one but you and the issuing bank need know that the card is secured by a bank account.

Once your loan or credit card application is approved, you make the regularly scheduled payments, perhaps even paying the loan off several months in advance. Your lender will then report you to the large credit reporting agencies such as Experian, Equifax and TransUnion as a reliable customer, and you will find it much easier to receive approval on future credit applications.

At one time, this was probably the best way for a young person just starting out to obtain credit. Today, however, using a savings account to secure credit is probably better left to those who have had previous credit problems, such as serious delinquencies or bankruptcy. For people without a credit record, getting credit isn't as tough as it used to be. If you are a full-time college student, for example, you can apply for a MasterCard or Visa from some banks without having to have a job or any other source of income. And several banks will consider giving one of its cards to other persons provided they have an annual income of at least $8,000, or less than $700 per month.

Another way to establish credit is through applying for a gasoline credit card or a card issued by one of the nation's larger department stores. Many of these companies have very lenient credit-granting policies, and you may find it easier to obtain credit from them than from a bank or other lending institution. Again, once you establish a record as someone who pays bills promptly, getting credit from other sources becomes a much easier task. In fact, after a little while you may find yourself receiving letters from credit card issuers telling you that you have been pre-approved to receive their cards.

Of course, not everyone who applies for credit is going to get it. You can be turned down for credit if you have no income, or very little income, if your job history is brief or erratic, or if your current debts (including lines of credit you have on current credit cards) are too large in relation to your income. For example, if you already have a couple of MasterCard and Visa accounts, you could be turned down for additional credit, even if you keep your current balance on each of the accounts low.