A Story About Establishing Credit

Let me begin by sharing a story, because I think it gives some interesting insights into How To Establish Credit.  It happened to me about a year.  At the time, I had been completely debt free for 10 years.  I had not even had a credit card for a few years.  At one point, I became concerned that someone would get a hold of my debit card and use it to empty my checking account.  Since credit cards include better consumer protections than debit cards, I decided to apply for a credit card.

I sent in a credit card application with a major credit card issuer.  My application for a credit card was denied.  I had long ago established a good credit history.  My credit score was around 750 at the time, I had money in the bank and did not owe a dime to anyone.  I was shocked.  I applied with another credit card issuer and my application was again denied.  I could not believe it.  The problem? They would not issue a credit card to me because I didn't have any credit cards.  What?

I considered getting a secured credit card, but I never followed through with it.  One day my mother wanted to buy some jewelry at a department store.  If she opened a new department store charge account, she would get an additional 15% off of her purchase.  She already had a department store credit card with them, but she knew someone who didn't, me.  She had her heart set on getting the piece of jewelry and the 15% discount was going to be a significant savings for her, so I agreed to help her.

We went to the department store and I applied for a department store credit card.  I was approved and received a $300 limit.  Since the credit limit was so low, I had to add money to the department store credit card so that I could pay for all of it on the store credit card and receive the 15% discount on the full amount.

Once we completed the jewelry purchase, we also received 10% in store credit that we essentially had to spend that day.  We start racing around the store trying to find something worthwhile to buy.  We finally settle on some luggage, which we split.  So, after two hours, we leave the store with the jewelry, some luggage and a new department store credit card.

My mother paid me back for the jewelry purchase.  When the credit card bill arrived, I quickly paid the bill in full and put the credit card in a safe place.

About a month after our little shopping spree, the credit limit on my department store credit card was raised first to $1000 and later to $2000.  I also received a pre-approved credit card offer.  I filled out the application and I received a credit card with a $5000 limit and 0% interest for a year.  The next month I received another pre-approved credit card offer.  I filled out the application and received a credit card with a $3000 limit and 0% interest for 15 months.  In three months, I went from having no credit to $10,000 in available credit.

How To Establish Credit

Based on my recent experience, here is my plan for How To Establish Credit.

Department stores have a big incentive to extend credit to their customers.  First of all, a department store credit card makes it easier for you to purchase more from their store.  Department store credit cards also tend to carry a very high interest rate (20-30%), so if you do not pay the balance in full the store will earn a very good return on your outstanding balance.  Finally, the department store knows that the people that hold their credit cards are prime targets for their store promotions.  Department stores are so interested in having their credit card in your wallet, they will often give you a 10-15% discount on your purchase when you establish a charge account with them.

With all that in mind, a department store is probably the best place to start to establish credit.  You should look for an opportunity to open a department store charge account, make a significant purchase and pay the bill in full when it arrives.  That is where the discount for opening a charge account comes in.  A friend or family member planning to make a significant department store purchase would probably like to receive a 10% discount.  You can go to the department store and complete a credit application.  When you are approved, you make the purchase for your friend or family member and they give you cash.  When you do this, your friend or family member receives a discount on their purchase and you start to establish credit.

After you have made the purchase, deposit the money into your checking account.  When the credit card bill arrives, quickly pay it off in full.  Keep your credit history current by making a small credit card transaction at least every six months and paying off the bill when it arrives.  If you don’t go over your credit limit and pay all your bills on time, you will develop a credit history that reflects that you can responsibly handle credit.  Establishing a good credit history will lead to an increase in your department store credit limit and offers from financial companies willing to extend you credit.

Conclusion

Knowing how to establish credit will help you to start developing a good credit history.  A good credit history will not only allow you to finance major purchases in the future, but also at a much lower interest rate.  Learning to responsibly handling credit early will pay big dividends throughout your life.

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