If you have no credit or bad credit, there may come a time when you need a line of credit extended to you. If you have good credit, chances are you are already familiar with how it works to get credit. For those with good credit, it merely takes a formal request from a lending company and you can almost always be assured that the better your credit rating, the better the terms will be.
If you have bad credit or worse, no credit, you will find it hard to get credit extended to you and if you do the terms of payment will be extremely high. There is a reason why those with bad or no credit are given higher rates - most in this category will probably default the agreement, therefore the extra penalty is to cover those who do not pay. If you have no track record of credit, the lending industries have no idea if you are going to pay. The older you get without a credit record, the more questions it raises.
For Those With No Credit
In some ways, you are worse off with no credit than with bad credit, especially the older you are. It raises issues with the credit company on why you have been avoiding the system so long and could even imply in their minds you may be hiding from something bigger or sinister.
A credit or lending company has no basis to judge you future payment history and this automatically puts you at a high risk. With all high risk propositions, you get a higher interest payback rate. You may have paid your rent and utility bills on time and dealt with cash on a timely basis your whole life, but there is no record available for this kind of activity. Sometimes the utility bill record will be recorded as a form of timely payment in your credit report, but that may not be enough.
In your case, a lot will depend on your current income situation. If you are working at a job paying more than $18,000 a year you have plenty of options for starter credit cards. You probably don't want to rely on them long term, but use them as a tool for a better credit line. In almost all cases, you will need a checking or savings account.
Capital One, Providian, Orchard Bank, to name a few are high risk credit card companies that will approve almost anyone who earn more than $18,000 and have no past due on their credit record for at least 6 months. If you have no credit record and meet the income limit, you will be approved for an initial line of credit - most likely around $200.
Another source to consider would be gas cards and department stores. These kinds of cards are easy to obtain as long as you have a job and even without a prior credit history. You can usually start with a limit of $200.
Just a caution, don't go crazy and sign up for every offer coming your way as this could backfire and create points against you on your credit record for too many inquiries on your credit file. Start with no more than 2 cards every 6 months.
When you get the cards, only use them for things you would normally pay in cash, just set aside the cash you would have used and put it in a checking account so you can pay the balance off at the end of the month. Be sure to send your payment within a week of getting your bill. Send it first class certified mail to make sure it does not get lost.
In 6 months time, the 2 cards you have will most likely give you a credit line increase.
After a 6 month history of paying off 2 cards on a timely basis, apply for 2 more cards. Do the same thing with the 4 cards in your possession.
After a year of paying 2 cards on a timely basis and the newer 2 cards for 6 months, you will have put yourself in an enviable position. As long as during this time you have not made a late payment anywhere, almost any bank or credit lending institution will want to give you the best rate available.
If you feel comfortable, apply for things you need that require bigger lines of credit. Just be sure the loan or card you are after is really one you can afford in monthly payments because lending and credit companies will overlook your ability to pay for awhile [this is how most people get in serious debt trouble.]
Building up your credit is a good way to insure you get the best deal when you need to make a bigger purchase such as a car or a home. The difference in monthly mortgage payments between a good credit risk and a bad credit risk can be about $1000 a month on a home that is $200,000.
For Those With Bad Credit
You had credit in the past, but for whatever reason your reputation was blown. It could have been an accident, illness, unemployment, or a hard luck situation. It could be that you were just plain irresponsible with your situation or you were playing the system and failed. Perhaps someone has played a number on your ID and is posing as you. Whatever reason, you are stuck with a bad credit reputation and you need to get credit now, but no one will give you a chance.
First of all, don't take it personally. Don't panic. Don't fall for those quick fix solutions. Don't fall prey to those paranoid conspiracy theories. The problem is bad, but it can be fixed, it will just take time.
Look at it from the point of view of the creditors and lenders. They don't know you personally. This is a business and not a personal decision.
Credit and banking companies are out to make money and they do it by lending out money and extending credit using their own money and make interest in exchange for you using their money temporarily. It is not a gift. Much like stocks, bonds and other investment vehicles, these loans are their way of investing their money. The higher a risk they see, the more interest they will charge because there is a big risk you may not pay and they can lose their investment.
All they know is what they see on paper. This paper includes your credit references, job history, income, and other data to merge your profile into a category which determines whether you are accepted or not. If there is a history of credit abuse or fraud, they are likely to turn you down because no one wants to touch a venture so risky they will lose all of their money. Just think, if you had a friend or family member who was always asking you for money, promised to pay you back and never did. After awhile, would you be willing to lend them more money?
There are things you can do to get yourself back on your feet.
- Get a copy of all of your credit reports
- Dispute items that may be wrong and correct the report
- Make payment arrangements with those you owe and pay on time
After 6 months of insuring you have no past dues on your record, start applying for credit cards as outline above in the section for those without a credit history.
Yes, at first you will have a crappy interest rate. If you stick to the plan and pay off everything on time, these companies will begin to trust you again and your rates will get lower, but you have to make sure you do not blow it by missing even one payment.
