When you say you want credit, you are probably asking for payment terms on a purchase. You are seeking to purchase goods or services today and forego all or a portion of the payment until a later date. You may or may not be bound by a payment plan. You may or may not be required to pay a percentage of the purchase price up front (down payment). You may or may not pay a fee (interest) in exchange for the privilege of buying now and paying later. In all cases, you are making a purchase and being trusted to make final payment at some time in the future.
How do you get credit?
Get an income
If you want to establish credit, you need a regular source of income. The income can be derived from a job, trust fund dividends, an allowance from your parents, government benefits, alimony, investment dividends, or any other source. What is important is that you have some kind of continuing and predictable cash flow. Without regular income, you cannot demonstrate an ability to make regular payments. Establishing a regular source of income is your first step.
Request credit from a lender who reports to a credit bureau
All your efforts to establish a credit rating will be wasted if your lender does not report repayment information to a recognized credit-reporting agency. Lenders are not required to report. Ask about their policy before you apply for credit. If the lender reports, then ask for a credit application.
Think small at first
By thinking small, you limit the lender’s exposure. Exposure is the lender’s total potential loss. If you have never obtained credit before, do not make your first request a personal loan for $40,000 with no collateral. This maximizes the lender’s exposure. The lender might be willing to extend you credit but not if big money is at stake. Try applying for a small loan, perhaps $500, and pay it off promptly. Then apply for another loan, perhaps a larger one. Eventually, you will have a solid credit relationship with that lender, and the credit activity will be reflected on your credit report.
Choose a credit card with a low credit limit
While thinking small, you may explore the chances of getting a credit card with a low credit limit. Major credit card companies frequently offer small lines of credit to groups such as college students or credit union members. If you are a student, look for applications in the back of campus magazines or in the school’s bookstore. Check with your credit union. Your status as a group member may be enough to get you a card. Get it, use it, and pay it off promptly. The activity will be reported to a reporting agency.
Apply for a retail store charge card
If you don’t belong to a special group, try the local mall. Many retail stores issue charge cards, which are similar to credit cards, but can only be used at the issuing store. Most major retailers will offer charge cards to first-time borrowers. Ask for an application at the cash register or customer service counter. The interest rates are usually high and credit limits low for first-time borrowers, but if you use the card and pay your bills promptly, you will establish a credit rating. Furthermore, the store may sell your name and address to other retailers, who will mail you invitations to apply for their charge cards.
Tip: Most retailers offer a gift or discount for your first purchase on a new card.
Make a large retail purchase and ask for credit terms
Many retail stores offer credit terms for high-ticket purchases. If you are planning to make a large purchase from a retail store, use the opportunity to establish credit. Major appliance stores, furniture stores, video/stereo stores, computer retailers, home improvement outlets, and jewelry stores (to name a few) will extend credit to first-time borrowers for the sole purpose of closing the sale. You can even find zero-interest deals when shopping in competitive markets for high-ticket merchandise, such as jewelry. Check your local paper or listen to radio advertisements for special deals.
Caution: Many of the so-called zero-interest financing deals require that you pay off the entire balance by a certain date. If you fail, you must pay interest on the outstanding balance, retroactively from the date of purchase. Make sure you understand the risks before signing on.
Obtain a gas card
Most major petroleum companies offer gas cards to first-time credit seekers. These can be used to purchase gas and services at any of the company’s stations. The credit limit is low and the balance must be paid in full every month. Ask for a card at your favorite gas station, or check popular magazines devoted to travel, vacation, automobiles, or business for applications and toll-free numbers.
Apply for an overdraft line of credit on your checking account
Another way to start small is with your own bank account. Most consumer banks will provide a line of credit attached to your checking account. It is often called an overdraft account because it is designed to cover bounced checks.
Here is how it works. You have a checking account. You apply for, and are granted, an overdraft line of credit in the amount of $500. Your checking account balance is $40. You write a check for $75. When the check is presented to the bank for collection, the bank does not return it for insufficient funds. Instead, it credits your checking account in the amount of $100. Now you have a balance of $140 in your account. The bank can honor the $75 check, leaving you with $65 in the account. The bank bills you monthly for the $100. You can repay the $100 all at once, or make minimum monthly payments. You will be charged interest and perhaps a service fee. Although it may not look like a loan, it is. Activity on these accounts is regularly reported by many banks.
Join a health club
Many clubs that require annual membership fees can arrange financing. If you are planning to join a club, take the opportunity to establish credit. The club is probably not extending credit itself. It is probably working with a local bank or finance company that is willing to be permissive about approving club members’ applications for credit. Find out who is extending the credit and whether they report payment activity.