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Question: I always pay cash for everything and have no
credit history. What is the best way to establish a credit
record?
Answer: It may sound crazy that you have to use credit
to get credit, but that's the way things work. In order to
qualify for a large credit purchase such as a car or a home,
you must show that you are a good credit risk. In other
words, you must demonstrate that you can use credit
responsibly by making your payments on time.
Whether you are a student, a young adult or someone who
has had credit problems, you'll find that credit cards are
important for many reasons in addition to convenience. If
you have car problems, you may need a credit card to cover
costs. Credit cards are required to guarantee hotel
reservations and car rentals. It is often difficult to cash
a personal check outside your own community. People with
past credit problems may want a secured credit card for
emergency purposes.
Establish credit as soon as you can. One way is to
start with a "secured" credit card. Secured means that you
establish a savings account or invest in a certificate of
deposit with the institution that issues you the credit
card. This is their security in case you fall behind in your
payments.
You will pay higher annual fees and interest rates for
secured credit cards. Some institutions charge a processing
fee and some do not pay interest on your deposit. Shop
around for the best card.
The institution requires you to leave your savings as
security for 12 to 18 months. Then, if you have a good
repayment record, you should be able to switch to an
unsecured card. You will have a credit history and should be
able to negotiate a no-fee, low interest card. Now shop for
the best unsecured card.
If you qualify for a secured card at all, you can do so
on your own. Do not deal with "credit repair experts" who
claim they can obtain credit for you for a fee. This is an
illegal practice.
You can get information about secured credit cards at
www.cardweb.com. Any Web address ending in "com" is a
commercial site, so evaluate its information carefully.
For more information, contact your local
Colorado State University Extension office.
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