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Establishing Good Credit with a Credit Card
Credit unions often offer lower interest rates than banks
Get your first card through a bank or credit union
Learning to handle credit, whether it is a simple loan, a credit card, or a mortgage, is part of becoming an adult in our complex society. Even people who feel strongly about saving, living simply, and avoiding debt, find themselves in situations where borrowing is the wisest course of action. It is important to plan for that moment even if you don not want to become a heavy credit card user. The good news is that the only thing required to establish good credit is a little forethought and a bank or credit union.
Credit cards are commonly used to begin establishing a credit history. The best approach is to get your first credit card through your bank rather than through an offer received in the mail or through a retail store. Getting a credit card through your bank allows you to talk to someone about it before applying. Being rejected for a credit card application is a black mark and no one wants to start that way. At a bank, a loan officer should be able to tell you by looking at some financial figures whether you are likely to be accepted for a credit card with them. If not, a secured card may be suggested or you can specifically request a secured card.
A secured credit card is essentially a probationary arrangement with the bank. In this situation, the borrower places a specified amount, say $500.00, in a savings account that cannot be touched. The amount in the savings account creates a risk-free situation for the bank while helping you establish credit with your first credit card. Should you fail to make payments, the bank knows you have the money to cover any purchases. The period at which the secured status ends, assuming responsible behavior on the card-holder’s part, should be established ahead of time. Six months is common.
It is vital during that time to use the card for small purchases that are easily paid off each month. This shows you can make reasonable financial decisions and make regular payments. Failing to use the card does not demonstrate your ability to intelligently handle one. After the probationary period, you keep the same card but the money in the savings account is released. You then have a real credit card with the danger of making real mistakes that could result in bad credit instead of good credit. The best policy with credit cards is to use them sparingly and pay them off each month.
Getting a credit card through a credit union or bank is a great first step toward building a positive credit history. It establishes a valuable relationship with a lending institution that can help you with larger loans at a later date. Even before accessing your official credit score, they can see that you have been responsible handling your accounts with them. This creates a feeling of trust and goodwill that can open the road for trouble-free lending in the future.