Wednesday, September 5, 2012

How to Build Up Your Credit History and Not Go Broke

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Looking back at the summer of 2007 when I just moved to New York City, I remember my first disappointment: I couldn't get a plan with AT&T. I was denied because my credit history was not established, and I was offered to pay a deposit of $500 in order to get a two-year contract with the company. The money was supposed to be returned a year after, but it seemed like a lot to pay compared to Sprint and T-Mobile, and I walked out of the store promising myself that I would work on establishing my credit history.

Easier said than done. I tried applying for credit cards at Macy's, Sleepy's, Century 21 and online, and I was denied again and again. Sometimes I'd just fill up an application knowing in advance that there would be a letter in the mail to inform me that there was "insufficient information" on me, or something of the kind. People consoled me saying that no credit history is better than bad credit history, but I knew there had to be something I could do to start building up my credit, and thus my research began.

What I learned was that building up your credit is actually not so difficult once you get your foot in the door, which in itself is not easy. One of the things you can do if you are in the same boat I was is to go to your bank and ask if they can give you a secured credit card meaning that you will have to deposit a few hundreds and they will use the money as your credit limit for a few months. As soon as you start paying back and they see that you are trustworthy, your credit history will boost, and you will get lots of offers in the mail.

In the meantime, keep applying for the credit cards you receive offers for. As I was ready to request a secured credit card, I got an offer from Capital One and - wow - they said yes!

A few months after I paid each of my bills on time, my mailbox was loaded with other offers. When it happens to you, see what annual percentage rates (APRs) are better than the one you already have. You want to aim for 10-12%, while your first offer might be around 25%, for the lack of a better proposal. There usually are cards from banks like Credit One that charge you twice as much interest compared to more established banks, plus high annual and maintenance fees. Avoid those at all cost. Believe me, there are better deals. Keep looking.

Be careful, though: that first credit card will supply you with some "free" money you can spend on anything you wish. The "free" is actually not free; you will have to pay it back eventually, so use it wisely. As your credit history boosts, your credit limit will become bigger and bigger, and there will be more temptations. When the desire to buy something is unbearable, always remember that if you don't pay back, you will get hit by high interest, and if you only pay the minimum amount every month, it might take you over a year to pay back the debt; therefore, it might be a good idea to evaluate how much you can pay every month without having to starve or limit yourself in other ways.

And by the way, you should never use up all the credit limit. You are usually given 25-28 days to pay your balance, and if you don't, you will be charged interest, depending on the amount you owe and the APR, which takes from your credit limit as well. In addition, we all have unplanned expenses we use the credit card for, so it's a good idea to have some extra money just in case the car breaks down and the repair is time-sensitive.

Finally, when you credit history is good enough and you have a few accounts, always monitor the cards even if you don't use them. Make sure there are no fraudulent charges on any of them. If you see something suspicious on your statement, go to your bank and make matters clear. It is very important that you know how much you spend and what charges you or other authorized users are responsible for, and which ones you had nothing to do with.

If you do everything right and always pay on time, you will earn a good credit score, and a lot of doors will open in front of you. In the end of 2011 I finally got an I-phone with AT&T, deposit-free, and I received a few offers for car loans, and let me tell you something: good credit score is much better than no credit score, so there is no reason for you not to start establishing your credibility and enjoy things you can't pay in cash for.

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