Using Credit Cards to Build Your History
Posted by Gail | Filed under Credit Wise
I am constantly astounded at the number of people I meet who are in a bind because they have no credit history and, so, can’t borrow money. This is something we associate with older, widowed women who have been cared for by loving, controlling spouses who have now left them to their own devises. But that’s just part of the story. First off, not having a credit history isn’t the domain on slightly out-of-touch women – there are men out there who haven’t got a clue because their wives do EVERYTHING. And it isn’t the exclusive territory of our elders – there are young, professionals who haven’t bothered to establish their own credit identities.
Everyone needs to have the ability to borrow money. That’s true whether you’ve just found yourself in the new role of single parent without an emergency fund or you’re a young adult starting out. And the fastest, cheapest and easiest way to establish a credit history is with a credit card.
The first time you borrow, you will likely need to have sufficient assets to secure the loan. Borrowing money to contribute to a retirement plan is a great way to begin establishing a credit history. Most people overlook credit cards as an option because they don’t realize a credit card can be secured.
With a secured credit card, you put up cash to cover your balance. Lenders often want twice the credit card limit, so if you want a $500 credit limit, you’ll have to ante up $1,000. Once you’ve established your ability to manage the card – anywhere from six months to a year – you can ask for the security requirement to be dropped and your deposit returned. (Make sure you’re being paid interest on your deposit while the credit card company has it in their hot little hands.)
Secured or unsecured, a credit card can be the cheapest way to build your credit file. In the old days, you had to take a loan, which you then repaid to establish yourself. All the while the interest clock was ticking. So you were “buying” your credit history. With a credit card, you can build a credit record without it costing you a cent. That’s because credit cards let you use the issuer’s money for a specific period of time interest free. And as long as you repay the outstanding balance in full every month, you can continue to use that credit at no cost. What a deal!
In terms of ease, the hot credit card market means issuers are pretty well throwing cards at consumers these days. Just pick one, fill in an application and see what happens. Of course, as a smart credit shopper, you’ll educate yourself before choosing your credit supplier. You’ll learn, for example, that:
- there are three kinds of credit cards: Travel and entertainment cards (American Express, Diners Club) which don’t have preset spending limits but which must be repaid in full each month. Company or retail store cards (Sears, Shell) that are accepted by the issuing company and usually charge the most outrageous rates. Bank cards (Visa, MasterCard) that let you “revolve” credit by paying a portion of your balance each month.
- teaser rates – those low interest rates offered as an enticement for you to sign up for the card – last only three to six months, and only for as long as you pay on time. Pay attention to the terms and the expiry period, and make your payments well before the due date, so you don’t get caught paying exorbitantly high interest.
- the type of credit consumer you are should dictate the type of card you have. If you find yourself carrying a balance, search for a new card with the lowest rate and transfer your balance to that new card. If you pay off your balance every month, you might want one of those more expensive cards – who cares, you’re not paying interest anyway – that also offers frequent flier miles, cash back, or special insurance options. Just make sure the payoff is worth the price of the annual fee.
Credit cards can be invaluable when it comes to establishing a credit history. Get one, charge everything, pay it off – all off – every month, and in no time flat you’ll have a credit history that will earn you preferential rates when next you need to borrow money.
March 24, 2008 at 2:19 pm
“If you pay off your balance every month, you might want one of those more expensive cards – who cares, you’re not paying interest anyway – that also offers frequent flier miles, cash back, or special insurance options. Just make sure the payoff is worth the price of the annual fee.”
If you pay off your balance every month, consider seeking a credit card with a perk that has no annual fee. I’ve received about 500$ in free groceries with my PC Mastercard and a dividend cash back payment with my visa. I’ve used these cards for more than five years and never paid the companies a cent for these freebies
March 25, 2008 at 3:31 pm
Some of the best advice I got in Highschool was when our “life skills” instructor taught us the value of credit. The class was only 1 hour, and a whole lot of students skipped that block (woah is them), but in that short time we were told how to write a resume and do a job interview. Then how to open a chequing account, how to read a bank statement, how to write a cheque properly, and most importantly — that it was good to get a “student” credit card as soon as possible, then JUST pay for food and/or gas with it and make sure to pay it off EVERY month. (His reasoning was that it’s always easier to get credit when you don’t need it, and a long healthy credit history helps when you eventually want something important like a home — AND it’s an easy way to keep track of exactly how much you are spending on food/gas…. (note this was before Interac so for anything retail it was cash, check or credit card).
That class made me keenly aware of how powerful credit is, and how important it is to know what your money is doing. I only wish the class was manditory!!!!
March 25, 2008 at 10:35 pm
I also got my first credit card as I was finishing high school/starting university. I had a $250 limit to start, there was no fee and this is still the primary credit card I use to this day. The company has given me lots more rope to hang myself with in terms of my credit limit, but I continue to pay off my entire balance in full every month. Visa hasn’t made money off of me in years….
September 9, 2009 at 12:34 pm
Hi Kelly thanks for sharing your credit card experience with us. It sounds good.
July 17, 2010 at 11:29 am
Hey! Thank you for this informative blogpost! btw: I found this site where you can get a bank account at a bank in austria: http://www.konto-im-ausland.info/ Hope this is useful for you! Best Regards