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Establishing Credit

A series of financial security tips

One pillar of financial society is built on the idea of credit: student loans, credit cards, home mortgages, and other kinds of financing arrangements that allow us to spend more than we may have readily available in cash. Understanding how to establish and maintain a healthy line of credit can set us up for success and pave a way for growth and opportunity.

Build a credit record

Credit cards can be a helpful financial tool and a great way to make purchases online since they can offer certain protections that debit cards do not, such as fraud reporting, liability against unauthorized purchases, cash back or rewards, or even purchase protections and product warranties.

Without any established credit, it can be difficult to do many things such as rent an apartment or get approved for your first credit card. One way to begin to establish a credit record is to apply for a gasoline credit card or a card issued by a larger department store. Many of these companies have very lenient credit policies, and you may find it easier to obtain credit from them than from a bank or other lending institution.

Be aware that many companies offer credit cards with higher interest rates for those who need to establish credit. However, you can avoid interest charges and build your credit by charging a small amount each month and paying off the entire outstanding balance if possible. Once you establish a record as someone who pays bills promptly, getting credit from other sources becomes much easier.

Paying off the balance each month will help you avoid any finance charges and will show a trend of timely payments above the minimum required amount. The issuing bank will then report you to large credit reporting agencies as a reliable customer. You will find it much easier to receive approval on future credit applications if you pay your bills promptly.

One recommended method of obtaining a loan for the first time is to establish a savings account with a bank, savings & loan, or credit union in your area. Ask this institution to extend you a loan using your own savings account as collateral.

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. Be careful when discarding pre-approved applications. Credit and identity thieves have been known to rummage through trash cans in search of them. A thief may fill out the application, change the mailing address and receive the card. Before you know it, the thief is running up debts in your name, damaging the good credit record you have been trying so hard to establish. Shredding any credit card applications you receive can help minimize this problem.

How Your Credit is Rated

You might be turned down for credit if:

  • You have little or no income
  • Your job history is short or erratic
  • Your current debts are too large in relation to your income

If you have high credit limits, even if you are not taking advantage of them, you may still be declined on the basis of your potential to incur debt. For example, if you already have a couple of MasterCard and Visa accounts along with a department store card or two, you could be turned down for additional credit, even if you keep your current balances on each of the accounts low.

Although the three major credit bureaus (Equifax, Experian, and TransUnion) maintain your credit history, they do not decide whether or not you will actually get a loan or a credit card. Individual lenders make those decisions based on something commonly called your FICO score.

FICO scores are determined by weighing a number of factors, including:

  • Payment history
  • Balances owed
  • Available credit
  • The amount of credit for which you have recently applied

Your record then receives a score ranging from 300 to 850. Scoring at or near the bottom of the range means you are likely to be turned down for most loans or forced to pay a much higher interest rate. Scoring near the top makes you eligible for the most favorable terms from most lenders. The Fair Credit Reporting Act requires that each of the three nationwide consumer reporting companies provide you with a free copy of your credit report, at your request, once every 12 months. 

The information contained in this post is intended for educational purposes only and was compiled from an article penned by Work-Life Solutions experts, WashU’s employee assistance program vendor. If you would like to do a deeper dive or talk with someone about your specific situation, consider the following resources: