Seven Tips For First Time Borrowers Trying To Develop Credit History During A Recession
In the not so distant past, it seemed that it was the birth rite of young adults and college students to apply for a credit card, and begin the process of building a credit history.
As the banking crisis has intensified and lenders have become more risk averse and less ready to lend to young people with no credit history, people wanting to apply for their first credit card have had to become more creative in the ways they establish unsecured lines of credit.
In an environment where prudence, shrinking, recessing and defaults are the names of the game, it is increasingly difficult for borrowers who are perceived to be risky to obtain loans, and unfortunately the definition of risky these days includes first time borrowers such as college students and young adults.
First time borrowers faced with the problem of not being able to obtain credit will therefore need to be imaginative about establishing credit histories, which if maintained positively, will help them in the future with moving from being perceived as a high risk applicant, to moderate or even low risk.
A good place to start trying to build a profile or credit history is by starting off with a white labeled store credit card, or a gas card since they are usually far easier to obtain than regular bank issued credit cards. It must be said those types of cards are suffering defaults themselves, so it may be as equally difficult trying to obtain one for someone with no proven credit history.
The other reason lenders are reluctant to make loans to first time borrowers is concerns that the applicant is not holding a job which is steady or maybe made redundant. Steady income is a major criteria for lenders making the lending decision, with higher unemployment rates, more individuals are opting to continue with further education or are becoming career students due to a lack of jobs, which means it becomes more difficult obtaining credit.
Even with a large amount of obstacles, it is unnecessary for first time borrowers to wait until the economy recovers with no credit history. Indeed doing such a thing could have negative consequences for the individual. When it comes to future borrowing requirements later in life, such as a mortgage, the longer more established the credit history, the better chance the individual will have of being able to obtain a loan when they need one.
Limited credit histories can also prevent individuals from being able to rent apartments obtain car loans, and sometimes be a poor reflection of a job application.
Therefore here are Seven Tips For First Time Borrowers:
1. Explore banking relationships.
Card issuers tend to prefer known quantities, they like to know their customers before they decide they will lend to them. Therefore a credit card issuer will be more likely to provide credit to someone who has limited or no credit history if it has done business with that person already. Establishing a relationship with a bank that issues credit cards is an extremely simple thing to do, and builds the relationship with a lender, before building a credit history. Once the bank becomes familiar with the individuals spending habits, it may become more likely to approve an application by the individual for a credit card.
2. Get a secured credit card.
Placing collateral with the bank and using it as security for a credit card, is a great way of establishing spending pattern with the bank. Secured credit cards operate in exactly the same was as ordinary unsecured cards, and holders of these type of cards can show the bank how they behave using this kind of product, and if it is responsibly, then the card issuer becomes more likely to want to issue the individual an unsecured card, which will help build the individuals credit profile.
Some card issuers may even treat secured card payments the same as they do unsecured, and if the individual pays bills on time, those payments may even be reported to the credit bureaus, which obviously starts building history, and raises the credit score over time. In fact, if the holder of a secured credit card is consistent with their payments, many card issuers may even raise the spending limit of the card, to over what has been provided as collateral, turning the card into a partially unsecured credit card.
3. Look for special programs.
Some card issuers have special programs aimed specifically at first time borrowers who are trying to build up credit histories. Lenders like to target new customers when they are young under the premise that they may become lifelong customers and often these programs issue cards with low spending limits, but enough to get started with building a history and credit profile.
4. Consider less-than-stellar terms.
With credit being tightened across the board, the times we live in might dictate the terms that we are willing to borrow on. For some individuals the only option available would be to apply for cards which carry extremely high interest rates, or charge very high annual fees. High annual fees may be worth paying if it enables the individual to build their credit history, score and profile, so that in future the individual becomes eligible for better offers. If the individual does not carry a balance on their card, then likewise, interest rates become irrelevant, and the card can be used simply to develop credit history and improve scores. Individuals need to be disciplined however, and make sure the outstanding balance is paid off in a timely fashion every month. 5.
5. Take advantage of college offers.
Credit card companies often target college students, and whilst there has been much debate over predatory lending practices, in Australia, the big four banks have a variety of student financing offers for credit cards and personal loans which will help build credit histories and scores. Students should understand they are getting into a legal transaction, and have obligations once the loan or credit card has been granted, they should therefore make every effort to read the fine print, and for credit cards endeavour to pay the balance off in full every month.
6. Look to parents.
Many people get help from their parents when they first start out in life. If an individuals parents have the capacity to and are willing to lend a hand, they can co sign on a loan of the individuals credit cards, and so help them develop their credit profile.
7. Avoid applying too often.
A common mistake is for individuals to continue applying for the same card over and over agin despite having been rejected. Too many inquiries on someone’s credit profile can affect it negatively and impact the score in a bad way. If at first the individual is unsuccessful the first time having tried for one general purpose card, Visa or MasterCard, one store branded card and perhaps a petrol card and were turned down for all three cards, the best thing they can do is sit tight and wait for six months before re-applying.
Once an individual has opened their first credit account, they should plan to be a customer for the long haul and they should not plan on closing it, because that is the account that gives the individual the longest history, which will help the consumers score the most.
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