Unestablished Credit

UNESTABLISHED CREDIT

Question: I am 22 years old and have recently landed my first job out of college, I want to purchase a new car and know I will need financing. During my first few trips to various dealerships I have been told that I have a very low credit score. I have no idea why my credit score is low because I have never taken out a loan before and always pay my bills on time. How can I improve my credit score?

ANSWER: Many people face this same situation in which they are told they have low credit upon investing in their first large purchase such as a vehicle or house. One of the reasons you are having a hard time is not because you don’t pay your bills on time, it is actually because you just don’t have enough credit history established; we call this unestablished credit. The most important thing to understand is that good credit does not just magically happen, it must be built. Unestablished credit is very common amongst recent grads and there are in fact specific programs that are available to students within 6 months of graduating and help students receive good deals and good rates even without a cosigner. Many new car manufacturers have these programs and they are often called “new grad incentives”. Having unestablished credit is much better than redeeming oneself from bad credit, so you are in good shape. The fastest way to build credit is to open a credit card and use it! The more frequently purchases are charged AND paid off on time, the better. A second good way to build credit is to raise the limit on existing credit cards, this alone makes us appear more credible to lenders. The idea of “holding credit” is basically being credible or trustworthy with money. If the credit card company trusts you with a larger sum of their money, so will the auto lender. So talk to the bank and see if any of your credit cards can be raised to a higher spending limit, just doing that should improve your credit score automatically. When you do take out a loan be smart about it. If this is your first loan, it is important to make sure you are able to make the payments now and in the future. One mistake many people make is not considering their changing lifestyles and unexpected expenses when deciding exactly what they can afford. Remember if you can pay this first loan off successfully you will be well on your way to establishing excellent credit.

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