Building a Strong Credit History

Fortunately (or unfortunately as the case may be), the extension and use of credit is vital to our economy as well as to our lives. We all must spend money, and if we don't have it readily available, having the alternative of buying on credit (in other words, borrowing) can often make things easier. Even if we buy only necessities and pay our outstanding balance in full every month, it's important that we have credit available to us. This option, however, requires that we establish a good credit history. If bankruptcy or some other financial setback has resulted in negative credit against us, it's important that we work to rebuild a good credit rating. The following steps can be applicable whether just beginning or reestablishing good credit.

One of the first and easiest steps in establishing a good credit history is to open savings and checking accounts. These are not only ways of storing your money, but also of learning to manage your finances responsibly. The next step logical is to obtain some type of credit in which the lender will report your payment record to the major credit bureaus, such as a credit card.

Young adults, particularly new college students without a credit history, often receive offers from banks and other businesses for credit cards. These offers will usually extend a fairly low amount of credit, typically $250 to $500. Getting one of these credit cards, using it carefully, and making the payments before the due date is an excellent way to begin establishing a strong credit history. After showing responsibility with this smaller amount of credit, your good credit record will allow you to obtain other credit cards with higher limits and lower interest rates.

If you don't necessarily fall into the above category, you can still begin to build (or rebuild) your credit record with a secured credit card. You'll have to deposit money into a savings or other deposit account with the card issuer. These funds are held by the lender as security for payment of the amounts charged on the card; they'll also determine your credit limit. After a period (typically a year or two) of making timely payments on the account, the lender may be willing to refund your deposit and issue you an unsecured card with a higher dollar limit. Study the terms and conditions of these cards (indeed, of all credit cards) carefully. Interest rates and fees can vary greatly and it's very important to comparison-shop. Refer the article Bad-Credit Credit Cards for more information and tips on finding the best card accounts available.

In some cases, people who've completed bankruptcy proceedings and whose debts have been discharged by the bankruptcy court may also receive unsolicited offers for new credit cards. The card companies' rationale seems to be that since the individual is now virtually debt-free after the bankruptcy discharge, he or she has more income with which to make future credit card payments. And although these offers can also be used to get back on track toward good credit, it must be remembered that any new credit should be used sparingly and with the utmost responsibility.

Another avenue of establishing a good credit history is by using a local retail store credit card. But make sure that the lender reports your use of the card and payment record to the credit bureaus. If they don't, you're wasting your time using their card. Remember, the purpose here isn't to get credit just to make easy purchases and rack up a mountain of debt. You must use the credit wisely. You're using it to build a solid history in order to gain access to more credit for those important purchases that you'll need to make down the road. Those lenders will request your payment history from the credit bureaus before granting you this additional credit. If a local retailer won't help you by reporting your account, don't accept a card from them. There are plenty of other local and chain retailers that do report credit accounts, so you shouldn't have too much of a problem finding one.

If you or your family has a business relationship with a local bank or credit union, they may be willing to extend credit to you. If the banker knows you personally, it's possibly that you could get a small loan on just your signature alone (of course, there's much more likelihood of this happening in a small local bank as opposed to your local branch of a regional or national institution). Or, you could be required to provide some type of collateral, such as that used for passbook loans. Be prepared to explain what you'll use the money for and how you plan to repay it. But also make sure that the lender will be reporting your loan and payment record to the credit bureaus, for the same reasons as stated earlier.

Loans are also available for the purpose of paying for higher education expenses. The applications and requirements vary according to the type of loan that's being sought. The financial aid office of the school or college that you want to attend is a good place to start the process. Repayment generally isn't required to begin until completing your program of study or leaving school. These loans are reported to the credit bureaus, so this is a great opportunity to establish your credit history.

Another possibility for establishing good credit is with the aid of a co-signer. For example, the parent of a teenager buying his or her first car may co-sign for the loan, guaranteeing its repayment in the event that the son or daughter doesn't meet the obligations. If the teen pays according to the terms and conditions of the contract, he or she will be well on the way to establishing a very good credit history. It should be noted, however, that it might be somewhat more difficult to find someone who's willing to co-sign for you if you're trying to reestablish credit following a bankruptcy or other financial mishap.

Once you've received a new credit card or obtained a loan, the importance of making timely payments cannot be more strongly emphasized. Even one late payment can be detrimental to your credit file. Endeavor to use your new credit wisely and responsibly, making all of your payments before they're due, and your credit history will reward you now and in the future with lower payments, lower overall costs, and a much more convenient lifestyle.

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