Chapter 2: Getting Started

With no credit history to help a financial institution assess their risk in lending you money, just getting starting in the world of credit can be a challenge. To begin, you have a few options:

Secured Credit Card
An excellent start is a secured credit card. With it, you are granted a credit line based on a percentage of a cash deposit you make to your financial institution. Because deposits are usually low, so too will be your credit limit. Application and annual fees for secured cards are often higher then those associated with unsecured credit cards.

Retail Card
Consider a local retailer's credit card. Their standards are often less demanding than larger credit issuers. Be sure they report to the major credit reporting agencies though – if they don’t, you won't be establishing a credit history.

Cosigners
Another option is having someone with a positive credit record cosign an account for you. This requires a great deal of trust on the part of the cosigner – if you fail to pay, he or she is responsible. You could end up jeopardizing a relationship as well as a credit record.

To Apply for Credit
To get a credit card you must fill out and submit an application. While you may receive a “pre-approved” card in the mail, it is just a marketing device. You won’t have use of the card unless you take the next step – completing the form and receiving notice of approval.

What Creditors Look For in a Credit Applicant
Creditors look at several factors when considering you for a loan or line of credit:

• Capacity – Your income should be enough to meet your current and potential credit obligations.
  
  
• Collateral – The creditor will need to know if you have something of value that will be available to them if the loan is not repaid. Collateral includes a car, home, life insurance, and money in a savings account.
  
  
• Character – Creditors will look at whether or not you’ve made payments on time and for the full amount. This information will normally come from the credit report. Stability in employment and residence may also be considered.

What You Should Look For in a Credit Card
Each credit offer comes with different terms. Before you apply, make sure you know what they are by reading the application carefully.

• Annual Percentage Rate (APR) –The APR is the annual rate of interest charged on an outstanding balance. The types of APR are:
  • Fixed. The interest rate stays constant for a set period of time.
  • Variable. The interest rate fluctuates according to an index (such as the prime rate, Treasury bill rates, or the Federal Reserve discount rate).
  • Tiered. The interest rate depends on the outstanding balance. For example, you may be charged nine percent interest on a balance up to $500, but 12 percent for $500 to $1,000.
    
    
• Grace Period – A grace period is the number of days – usually 20 to 30 – before interest is assessed on new purchases. The basic types of grace periods are:
  • Full Grace Period. Interest is charged on the carried-over balance, but not new purchases.
  • Typical Grace Period. Interest is charged on new purchases unless the balance is paid in full the previous month.
  • Two Cycle Method. Interest is charged from the statement cycle date, not the payment due date. Essentially, you’ll be charged interest before the bill is even received.

  Be aware that interest starts accruing immediately on cash advances – there is no grace period and the interest rate is often higher than for purchases.

• Annual fee – If you are new to credit, you may only be eligible for credit cards with a high annual fee. However, once you build a positive credit history, request that it be reduced or eliminated, or shop for a card that doesn’t charge for it at all.
  
  
• Late fee – Virtually every credit issuer will charge a late fee if you do not pay by the due date. (There are “no late fee” credit cards, but the interest rate increases if you make a late payment, so the benefit is minimal). Such fees typically range from $25 to $45.
  
  
• Over limit fee – If you exceed your credit limit, you will be assessed an over limit fee. The charge is usually the same as the late fee – $25 to $45.
  
  
• Application or activation fee – Some credit issuers charge just to activate the card. Unless your credit is already damaged, there is no reason to accept an offer of credit with such a fee.
  
  
• Miscellaneous fees – Some issuers charge for a variety of other activities, such as not carrying a balance, having an inactive account, or for carrying a balance under a certain sum. The better your credit history is, the less you have to accept such expensive terms.
  
  
• Add on charges – You may have the option to purchase:
  • Credit insurance – this product is designed to keep your credit in good standing if you cannot make the payments on your account.
  • Credit protection – this is a service is designed to protect you against fraud and identity theft. While it may offer you extra peace of mind, there are laws in place that protect consumers against this type of crime.