The importance of a good credit beginningJames Bollengierpre-existing credit history, revolving lines of credit
Randall, a 19-year-old college sophomore, was standing in line
at a local department store recently when he was propositioned with
a phrase that has become commonplace in United States vernacular:
"Would you like to save 15 percent on your purchase today?" When
Randall said "yes," the clerk asked him to fill out a form that
authorized the company to pull a copy of his credit report. Randall
knew that he had never had credit before, so he assumed that he had
a perfect score. You can imagine his surprise when the application
came back denied. Randall was perplexed, but didn't give it much
thought at the time.
One week later, Randall received a formal notice in the mail of
the denial, but what he found most puzzling was the stated
reason--lack of current credit history. It seemed contradictory
that he would need credit in order to get credit, but for most
lenders, that is exactly what is required. There are several
expressions of this requirement, and also several ways to deal with
it in daily life.
The most important thing to know about the requirement to have
pre-existing credit history deals specifically with revolving lines
of credit. As much as 30 percent of a credit score can be based on
the ratio of the limits on open credit cards versus the current
outstanding balances. Generally, any balance over 50 percent on a
single card or the overall limit-to-balance ratio can trigger a
remark that is viewed almost as negatively as a late payment. For
individuals with little or no credit history, the ratio can easily
be not applicable, automatically losing the ability to gain points,
or, in the case of someone with a $200 limit card, be a ratio of
zero, causing a substantial drop in credit score.
There are multitudes of ways to overcome these problems for
consumers. The ideal start to a credit history is to obtain two
major credit cards in good standing. Major credit cards include Visa, MasterCard, Discover, American Express, Diner's Club and Carte
Blanche. It may be necessary to begin with a low limit or secured
card, but there are a number of lenders, including Citibank, Discover and Chase, who have excellent programs
actually designed for college students that can be effective in
establishing history for anyone with limited credit experience. It
is also in the best interest of consumers to use the cards as
sparingly as possible and pay them off in full at the end of each
month. There is a common misconception that creditors want to see
balances since that indicates income through interest and fees for
them, but when it comes to establishing a good credit score, zero
balances on high limit cards will always matter more than anything
else.
Another repercussion of the requirement to have credit is the
value or hindrance of having a mix of financial history. Commonly,
there are two types of credit: revolving and installment. Creditors
like to not only see that revolving credit is being properly
managed, but also that installment lines of credit have been
obtained and kept current. Installment lines of credit include big
ticket items like student loans, mortgages and automotive loans.
Having at least one of these on the report is considered a strong
start, especially if the outstanding balance is 80 percent or less
of the originally financed amount. A first mortgage can also be a
great boost for credit scores. Many times, these accounts are first
obtained with the assistance of a friend or relative.
With the importance of credit in modern society, it is sometimes
unavoidable to think outside the box when considering the future.
One of the potential ways to start building a score is to get added
as a joint holder or authorized user on to existing revolving
accounts of friends or family members with a strong financial
standing. As long as the card is held only by the primary owner,
there is very little risk associated with this. Some banks will
also issue a credit card with a limit equal to an amount held in a
savings account, thereby helping a novice establish history and
mitigating any risk associated with lending to an inexperienced
borrower.
For installment loans, it is also often possible to begin a
history by taking out a small loan, say $500, from a bank where a
relationship already exists. Since a savings or checking account is
already in existence, there is a better chance for approval. Also,
having a friend or family member with established history co-sign
for a student loan or automobile can allow the records of one
person to positively impact the history of someone else. The one
drawback about co-signing is that a late payment made by the
beginner could seriously impact the co-signer's credit.
These are but a few of the pitfalls and solutions that can
directly impact the financial resources available to credit
newcomers like Randall. The most important thing to remember is
that it takes credit to get credit, so having a good start can make
an enormous difference towards the long term financial prospects of
an untested borrower.
James Bollengier is director of client services for RMCN Credit Services Inc.
He can be reached at (888) 469-7372, ext. 253 or e-mail
[email protected].
