How College Graduates Can Establish Credit
Getting credit is like getting a job. In many cases, you need experience to get a job. But you can’t get a job without experience. Similarly, you need credit to help you make major purchases. But you can’t get credit until you establish credit. It’s a vicious circle.
Click the player to listen to this episode of The BIGG Success Show Podcast. Below is a summary.
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One of George’s students, Leah, just graduated from college. She has applied for several credit cards and been turned down because she doesn’t have any credit history. She says she’s never borrowed before or even had a credit card. What can she do?
Let’s go to The Professor’s Whiteboard for 3 ways to establish credit…
#1 – Get a bank loan
This will cost you a little but it will be worth it so you’ll have access to money when you need it. Here’s a way to definitely get a loan:
Deposit $1,000 into an account (e.g. a Certificate of Deposit, commonly known as a CD) for a fixed period of time (e,g. 3 months). Ask that same bank for a $1,000 loan to be paid back at the end of the three months. They may require you to pay the interest monthly, or they may not.
Your loan is 100% secured by the CD, so the only risk the bank has is that you won’t pay the interest. You’ll earn interest on the CD, but not as much as you’ll pay on the loan, so you’ll be out-of-pocket a little bit of money.
But you’re establishing credit. At the end of the three months, pay back the $1,000. Now, up the ante. Do the same thing all over again with say $2,000. Then again … each time increasing the amount. Over the course of the year, you may do this four times.
Keep the amount relatively small because you don’t want to needlessly pay interest. You’re establishing that you can pay back a loan of $1,000, $2,000 or whatever the highest amount is that you borrow. Just make sure you make every payment on time.
#2 – Have a savings account, not just a checking account
To establish credit, you’ll look more favorable to certain companies if you also have a savings account. Don’t think you have to stuff it full of money. It just seems to make a difference that you actually have one.
#3 – Pay early, but not too early
We almost learned this lesson the hard way.
[Mary-Lynn] I took advantage of a no-interest credit card deal to make a higher dollar purchase. I was able to make payments on it with zero interest for 6 months.
So I religiously made every payment on time. Actually, I was paying early, and that’s what created the problem. I end up with two payments hitting one billing cycle, and none in the next cycle. So, it appeared as if I was late on a payment – even though I was ahead! They charged me interest and a late fee.
We contacted the credit card company and got everything squared away.
[George] The moral of the story is that you can pay TOO early. You have to pay attention to the billing cycle. Once you get credit established, make sure you check when the billing cycle closes and when your next payment is due. You may want to keep your payments within two weeks of that due date.
We always hear that cash is king. But your credit capacity is part of the royal family. Watch over it like it was money. Because it is! It helps you establish the credit you need to fund your BIGG success!
George “The Professor” & Mary-Lynn
Co-Founders, BIGG Success
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