How to Establish Credit & Build Good Credit

Establishing credit can be difficult for people without a good credit history. In order to build up to a good credit score, you need to establish a credit history. You can start with simply opening up a checking account and a savings account. For checking accounts we recommend a service called “overdraft protection” on your account. Overdraft protection will make sure your check do not bounce as well as help you avoid insufficient funds charges and other penalties.

Once you have a bank account it is important that you keep your account in good standing. That means that you should be careful not to bounce checks or overdraw your account. Again, overdraft protection can help you do this. After you have had your bank account open and in good standing for a few months, apply for a department store credit card. Department store credit cards are relatively easy to obtain and are a good way to start building your credit. However, it is important that you use your new department store credit card sensibly, or you will not build up your credit. Charge a few small purchases to the card and make sure you pay them off completely when the credit card bill arrives. Balances on your credit cards are a form of unsecured debt and such debt, when paid off, will build your credit history. After a few months, you should apply for a major credit card, like American Express, MasterCard or Visa. Try to find card that do not have annual fees and try to find a card that has a low interest rate. Once you have the card, be sure to use it responsibly – only charge what you can pay off at the end of each month. After all you don’t just want to build credit, you want to build a good credit history and credit score.

Lenders and creditors use your credit score to help determine whether to give you credit. Having a good credit score will help you get a low rate on a mortgage or auto loan and save you money. A credit score above 650 will help qualify you for most credit and loan terms. The higher your score, the better the interest rates available to you.

Information on credit scores, from the FTC: (source)
“Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.”

Other financial goals you can set to build good credit:
1. Create a monthly budget and stick to it: This simple commitment can help you start a savings plan and will keep you from building up unmanageable debt.

2. Check your credit report every three months: The first step to your credit health is to know which bad financial habits, such as late payments, are present in your credit report. Regular check-ups will also help you guard against identity theft.

3. Reduce your debt balances to below 35% of the available credit limit: Reducing your balances while maintaining active credit use makes you more attractive to prospective lenders and can help improve your credit score.

4. Clean up your credit record by disputing negative inaccuracies on your credit report: Don’t let your credit standing suffer because of inaccurate information. Many times your credit score is lower than it should be because of errors or inaccuracies in your credit report. It is possible to repair your credit your own, but it can be very time consuming and requires a lot of attention to detail. We recommend a Professional Credit Repair Service like the one offer through eCreditRepair.com which, for a small fee, let you to sit back and watch your credit score improve.

If you have paid your monthly payments on time every month and have had the same job for at least six months, you may be ready to apply for that vehicle loan or mortgage. Get copies of your credit report first to see what your credit ratio is - you'll see listings of all your unsecured debt. Consolidated loan programs can help lower the monthly payments if a family member has too many credit card bills.

Special section for women:
If you are a married woman, it is important to have credit in your own name. Having credit independent from your husband will protect you if you get divorced or if your husband dies before you. Some women who don't earn as much as their husbands find out after a divorce that they cannot qualify for the same credit they did when they were married. Be sure to notify all creditors should you marry or change your name. Check your credit report periodically and make sure you are listed on joint accounts. Checking your credit reporting will also let you see if there are any errors on the report regarding secured and unsecured debt.

If you own a home and have sufficient equity, a consolidation loan program may be a good option if you have too much unsecured debt. Consolidated loan programs may be an option for people who acquired too much consumer debt. Consolidation loan services help people who have more unsecured debt than they can pay.

If you do not own a home, debt consolidation without a loan will be your best debt reduction option.