Credit

The path to establish an excellent credit

Many young people struggle to establish credit. They apply for credit and they get rejected due to lack of credit history. The more they apply, the more they hurt their chance of getting approved. They go ask their parents to add them as an authorized user and their wise parents refuse to do so which is a smart move if their parents are smart. Parents with well-established credit should never ever co-sign a loan for their kids and should never ever add their kids as authorized users in their credit card. What should parents then do to help their kids establish and maintain a good credit? Well, the answer is easy. The steps below are helpful for people who have no credit history at all. For example, a college student with no credit history or a new immigrant that immigrated to the U.S. and wants to establish a credit.

  1. Apply for a secured credit card at a major bank that reports credit history on monthly basis to the three major credit agencies (Experian, Transunion, and Equifax). Some major banks convert secured credit card into a regular credit card after reviewing the account and seeing good payment history. Bank of America secured card is a good choice and it offers one of the best-secured cards in the market because it reports to Experian, Equifax, Transunion, and Innovis on monthly basis.
  2. After getting approved for the secured card, do not apply for any other credit for at least 1 year.
  3. Use your secured credit card responsibly and pay the balance in full online every month 5 days before the billing cycle ends. Most credit card issuers report the payment history to the credit agencies when the billing cycle ends. Your balance must be very low when the billing cycle ends and that’s why you should pay the balance in full 3-5 days before the billing cycle ends. Your balance should not be over 5% of your credit limit when the billing cycle ends. Call your credit card issuer to find out when your billing cycle ends.
  4. Pay the balance in full to bring the balance to $0 when the billing cycle ends to let your credit card issuer report balance of $0 to the credit agencies. Do this every other month. For example, billing cycle for January ends with a balance of 5% of total credit limit, then on February 3% and then on March 0% and then on April back to 5%. Remember, the balance should never go over 5% of your credit limit.
  5. Do not buy anything on credit card if you cannot pay it in full when the billing cycle ends. If you can’t pay it in full, this means you cannot afford it. Keep this thought in your head for the rest of your life.
  6. Do not apply for department store credit cards. Those cards are usually easy to get but they don’t offer great benefits. Remember, your goal is to have excellent credit that makes major banks crazy about approving you for the best cards with the best offers in the market.
  7. In about 8-12 months after opening the account and following the above steps, the credit issuer will review your account and might convert the account from a secured card into a regular credit card. After 12 months, there is still a big chance of getting rejected if you apply for another credit. Most major banks might reject the request due to lack of sufficient credit history. Most good banks want to see at least 24 months of good credit history before they even consider the request. Therefore, you should wait for at least 24 months before you apply for another good credit card that offers great rewards.
  8. After 24 months, you will have a good chance of getting a good card that offers good cash back. There are great cards that offer good cash back and I talked more about them in another post.

The most important thing to learn is to always pay the balance in full every month and never ever carry a balance and never ever have any credit card debt and always live below your means. Keep that thought in your head for the rest of your life.