Establishing Credit

When you are just starting out, you do not have a credit score. What this means is that you do not have any established credit. You do not have any loans, credit cards or mortgages to show how you make monthly payments. Established credit shows how well you make your payments each month in the form of credit cards, car loans, student loans and mortgages. I’ll show you the process on how to establish credit with my knowledge and expertise.

Where to Start

My recommendation while working in the financial industry and as a mom, friend and colleague, is to open a credit card. The most important detail here is the amount of credit you apply for. I highly recommend opening a credit card with a $500 -$1,000 credit limit. I want to stress to you to stay within that limit. Keep in mind this is to build credit, not to go on a shopping spree! Although this may sound easy now, but just wait until you really want something while you are shopping. Especially, when you know you could buy it because you have a credit.

Knowing and understanding how a credit card works is really important.

How to choose a credit card

When choosing your first credit card here are a few things you will want to consider:

1. There is no annual fee – Avoid credit cards with an annual fee’s!
2. Rewards Programs – You can get cash back, airline tickets, hotels, car rentals, gifts, etc. Credit card companies offer you great rewards so you spend more money. They want you to overspend! They want to charge you interest so they can stay in business. Make sure you don’t fall into this trap. For some people this is very difficult.
3. Know and understand all the details of your credit card
   1. Payment Due date
   2. Late Payment Fee
   3. APR (Annual Percentage Rate) This is the amount they will charge you on an annual basis to carry a balance on your credit card.
   4. Days in the billing cycle
   5. How you be receive your monthly statement? Email or regular mail?

Where can I apply for a credit card?

There are so many options to get a credit card, especially online. Be very careful and make sure you understand how the credit card works so that you are not surprised with a fee when you get your credit card statement.

• Your local bank or online bank. I recommend checking with your local or online bank to see if you can open a credit card where you hold your checking/savings account. They can see how responsible you are with your checking and/or savings account and that helps them make a determination when granting you credit. I have a credit card with my local bank. It can be very helpful, because if you get in a bind, they may be able to help you.
• Citi Double Cash – I have this credit card. It has no annual fee and does pay 1% on all purchases and 1% on all payments. Therefore, I like this one because it encourages you to make your full payment.
• Rewards – Many credit card companies have rewards to entice you to spend more. Of course, that’s how they stay in business! Likewise, they make money when you can’t pay your balance in full. Surely, it’s a hefty price tag too! For example, if their APR is 26.9% and you carry a $500 balance for 6 months you will be paying $35 in interest! Of course, it’s easy money for them. With this in mind, it’s money you could be spending on something you would like.

I just want you to be so carful when using credit cards because I have seen many people get into a lot of debt. If you are struggling with debt and unable to make your monthly payment, learn how to repair your credit report.

How do I apply for a credit card?

My recommendation is to get an application for a credit card where you hold your checking account. You can always go online and fill out a credit card application too. When filling out an application online, please be aware of the risks associated with open Wi-Fi. You will want to make sure the website is secure because you will be putting in your social security number along with your date of birth and other sensitive information. I highly recommend filling out your online application at home with a locked Wi-Fi password. You will be required to provide the following information:

1. First and last name
2. Address
3. Phone number
4. Social Security number (they may need a copy to verify)
5. Driver’s license (they may need a copy)
6. Employment, Employment address & phone number & length of employment
7. Monthly income
8. Monthly expenses (listed individually)
9. Your signature (This authorizes the financial institution to pull your credit)

What is reviewed in my credit report (When I have credit)?

Essentially, credit card issuers do not know how well you manage your money when there is nothing on your credit report. When you apply for a loan or a credit card, the financial institution pulls your credit report to review the following details:

1. If you make your monthly payments on time
2. What the credit limit is on each card
3. The balance(s) of each of your credit card(s) and loans
4. Your monthly payments on each loan and credit card

The loan officer is reviewing your credit report to assess what the risk level is to the financial institution.  They are also assessing your ability to pay them each month.

What payments do not establish credit?

• Cellphone bills
• Rent
• Utilities
• Car insurance

However, if you do not make these payments listed above, the creditors will probably shut off your service or evict you from your apartment. Then they will report the amount you owe to the credit bureau and this will definitely hurt (or lower) your credit score.

How will I know if I am approved?

The credit card company will notify you in writing if you are approved or denied. When going to your local bank, they may call you with an approval or denial. You can always ask for a phone call or email so you know quickly.

When will I receive my credit card?

After being approved for your credit card, you will receive your credit card in the mail typically within 7-10 business days.

Activating your card

After you get your credit card, it is important to activate it. Follow the directions on how to activate your card either online or via a phone number. Then verify that your first and last name are spelled correctly on the card.

Making purchases

It is very important to make small purchases on your credit card to establish credit. If you want to establish credit, you will need to use your credit card to make purchases. If you do not use your credit card it will not establish credit for you.

I highly recommend small purchases so that when your credit card bill comes in the mail, you can pay it in full.

Here a few ideas to make one small purchase each month:

• Itunes monthly storage. The cost for my itunes storage is $1.00 per month. I do this on my credit card that I don’t use very often. It reports to the credit reporting agency that I am using my credit card and I am paying it off every month. This is a very easy payment to make.
• Purchase one tank of gas on your credit card each month.
• Purchase one cup of coffee each month

The idea is to make a small purchase. That way it is easy to pay your credit card bill in full each month. This is how you build credit.

Your Credit Card Statement

When you get your credit card statement, you will want to review all the details, but pay special attention to the following information:

1. Transactions – You will want to verify you made each purchase. If you did not make the purchase, you have 60 days from the statement date to notify your credit card company of the errors. Here is what I did when my credit card information was stolen.
2. New Balance – This is the total amount of your monthly purchases. I highly recommend paying the New Balancein full each month.
3. Late payment Warning: This is the amount you will be charged if you do not make your payment on time.
4. Total Minimum Payment Due – Your credit card company will always give you the option to make a minimum payment. This is so they can make their money! Again, I recommend paying the new balance in full.

What can hurt my credit by using my credit card?

• If you have a credit limit of $500, and you spend more than $250, this can hurt your credit because your balance (or amount of money you spent) is too high.
• If you make your payments late. Evenone day late will report as a late payment and it will affect your credit score negatively.

Establishing credit is really important. I recommend doing this as soon as you turn 18. It’s also very important to protect your credit and make sure you are making all your payments on time to get a good credit score. When you have a good credit score you get the best interest rates on loans and mortgages along with the best insurance rates for your home, cars, trucks, etc.