Do you have a credit card?

I already wrote here about credit cards, and more specifically – about using them wisely.

But, lets step back a little, and discuss a different question – how to get a credit card?

So not everyone gets credit card offers in their mailbox every day. Some people get rejected over and over again for various reasons. Some others only get approved for credit cards they don’t really want, but those they do want – they cannot get.

How to solve this equation?

First you need to understand a very basic thing which is not always clear to everyone. Credit card is a loan. It can be the cheapest loan there is or the most expensive, depends on how you use them. In the article I wrote before, I describe certain rules of thumb that will help you make it the cheapest loan ever. But it is still a loan, a credit a bank gives you.

When considering credit applications banks always look at your credit report and credit score, pulling it from one or more credit reporting agencies. In this report, the bank will see what credit you have already been given, and how you pay it back.

Let’s break it into pieces:

1. The credit you have already been given – The assumption is, first of all, that you actually have a credit from somewhere already. If this is your first credit application – it will be declined, just because it’s the first. No-one wants to be the first to give you a loan; everyone wants to look at that other sucker that took the chance before them, and only then to consider you. So, if you don’t have any credit card or loan in the USA (or don’t have ITIN/SSN which is used for credit reporting) – your application will be automatically declined. I’ll discuss ways to solve this later in the article.

2. How you pay out the loans you’ve been given – If you do have previous loans or credit lines, the banks will look at how you pay them out. The lenders report the amount of payment you’ve been given, the type of the loan (e.g.: student loan, mortgage, car loan, credit card), and how you pay the loan out. Are you late on your payments? How late? There’s a difference between 2 days late (which may even not been reported) and 200 days late. Do you pay more than the minimum payment? If you only pay minimum payment – some lenders will report that.

If you pass the first 2 basic tests – you have previous loans, and you pay them on time and more than minimum, the banks will continue considering your applications. They’ll check the debt to credit ratio (the amount of the money you owe vs. the amount of the total credit given to you. The lower the ratio – the better). If you owe all the credit given to you (for example – maxed out all your credit cards) – your application will be declined.

The banks will also check how many credit inquires there are on your credit history (for the last one or 2 years). The more inquires there are the more desperate for credit you look, and banks don’t like desperate people. So, don’t apply for credit, unless you really need/want it.

What to do if your application is declined?

The application is declined because the credit report is not good enough for the banks. How to improve it?

1. If you have never had any loans – consider a secured credit card. Every bank allows getting one, and the credit limit will be secured by the amount of money you’ll put on a CD or other account at that bank. So, if you want a credit card with $1000 limit – you’ll have to put $1000 of your own in a CD account at the bank, and get a credit card in return. Usually, if you pay the card on time, the deposit will be returned to you after ~1 year, and the card will be converted to a regular credit card. To sum it up – secured credit card is a loan you give yourself through some bank. You will usually pay some fees to the card issuer, but will get competitive interest on the deposit. This is the best solution when you need to jump-start your credit history. Another option may be a cosigner. Someone else, with a good credit history, who will apply with you jointly for the loan. In this case, the banks may consider approving the loan based on the cosigners history, but providing the credit to both of you (and reporting it on your credit history as well).

2. If you have bad credit history – there’s no magic here. Don’t fall for advertisements of companies which will promise you to fix your credit. Only you can fix your credit. Read my tips about the wise usage of your credit cards, try to consolidate and pay off your debts, and stop applying (=adding inquiries) for additional credit until you sort the current debts out. There are companies which will help you negotiating your debt, you might want to consider using them. Make sure that the conditions are that you don’t pay anything up front, and the fees are based on the amount of debt saved to you, to avoid scams.

Shop wisely,

Your Little Advisor

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