It is an admirable thing for young people not to be sucked into the credit card trap, but to live within their means without using credit. However the disadvantage of doing this is that they have no credit rating. This is in no way as bad as having a bad credit rating, but essentially leaves no financial footprints to be assessed, to determine if someone is a good or bad risk as a tenant or a borrower.
It is typically the youngsters who find themselves in this position, and it is important that they do establish a rating early. If they plan to go to college then having their own credit rating can help considerably if a private student loan is necessary to cover the shortfall of federal loans. Obtaining a credit card is good practice for those who plan to travel as it gives built in insurance cover.
There are a host of reasons why a good credit rating is essential but the only way to get one is to obtain credit and start to use it wisely. But how do you get a credit card in the first place, without a credit rating?
The best route to obtaining this first elusive credit card is to have a current checking account in advance, which puts you in the position of already being a customer of good standing when you do apply for a card. You can enquire if the bank will be willing to give you a card, but unless you have a regular income deposited this will be unlikely. However your options are not closed as secured credit cards are available to cover this situation until you have established a good credit rating of your own.
You can check out secured credit cards on line to find the best deal or apply directly to your own bank that are more likely to change your card status from secured to unsecured more quickly.
Basically a secured credit card is one you obtain, for a typically low line of credit, by depositing an equal amount of cash with the bank as the line of credit which they extend. Thus if you are offered available credit of $300 you must deposit the same amount with the bank, who should hold it in an interest bearing account.
You then use the secured credit card in exactly the same way as you would a normal credit card, being careful that you do use it on a monthly basis to show credit activity which will lead to a credit rating. Your deposit is not used to cover your monthly payments but will be accessed by the lender if you are in default, which will also blow your chance of having a good credit score.
Secured credit cards typically come with high interest rates but don’t be deterred by these as your sole purpose in obtaining one should be to establish your credit rating, and in order to obtain a good rating you should pay off the total balance in full each month and thus not incur any interest. The best way to handle payments is by monthly automated debit for the full balance. As with an unsecured credit card you shouldn’t use the maximum available credit, but stick to the 30% mark.
The most important thing you should check before signing on the dotted line is that the lender does report all your credit activity to the three main credit bureaus. As secured credit cards are also used by people with bad credit ratings to help them get re-established, it is wise to request the bank to keep the secured status of your card hidden so there is no chance of being associated with late payment secured card activity.
Unfortunately secured credit cards usually carry a fee in the form of an application fee, monthly fee, annual fee or management fee. Avoid any which carry an application fee and do your research well to find the best deal on the other fees.
Your aim is to move as quickly as possible from a secured card to an unsecured card and this can happen within less than a year, but one reason why it is astute planning to actually make application through your own bank. When your status does change to unsecured you will have your deposit plus interest returned, and gone some way to establishing a good credit rating.