Building Your Credit History

How do I build good credit if I don't have credit yet?

To establish credit individually for the first time, start small and build up. Apply for a small amount of credit at a financial institution or even at a department store, but do some research first. Ask for a copy of the terms and conditions that apply to the type of credit you are interested in. Without any established credit, you may be expected to pay a slightly higher interest rate. Shop around. Interest rates, fees, and penalties for late payments can vary greatly.

Before you apply, ask if the credit grantor regularly reports your bill-paying history to a credit bureau. Since your intention is to build a positive credit history, avoid lenders who don't report your information to credit bureaus.

When you get the card or loan, use it. Consistently pay your bills on time. Each month, your credit grantor will report this information to the credit bureau. In this way, you'll establish a history of responsible credit use.

After six months, consider applying for another card. Continue using your credit and paying your bills on time. Before you know it, you won't have to ask for credit. Credit grantors will come to you. (Be careful, though, not to get carried away. Know your financial limits; keep your use of credit in check.)

If you're turned down for credit, ask the credit grantor for specific reasons. Perhaps your salary is not high enough or you haven't lived at your current address long enough. Time may resolve these matters. Reapply for credit when your situation changes.

Another option is to ask a close adult relative or friend with an established credit history to cosign your loan or credit card application. If granted,  the account will appear on both your and the cosigner's credit reports. Take extra care to repay your cosigned debt promptly. Failure to do so will hurt your cosigner's credit as well as your own. After a few months, try again to get credit on your own.

Yet another option is to apply for a secured credit card. To obtain a secured credit card, you must open and maintain a savings account as security for your card.

Not all lenders report secured card usage to credit bureaus, so be sure to ask if your lender does before you apply for the card. If the lender doesn't report your use of the card, having the card will not help you obtain credit in the future.

Also, beware of the extra fees you may have to pay to obtain secured credit. Secured credit cards typically have higher interest rates than unsecured cards. Annual fees also are common. Use extreme caution before calling a 900 telephone number for a credit card. The call itself can cost up to $50, and there's no guarantee you'll receive the card.

How can I create a positive credit history?

Pay your bills, on time, regardless. Most lenders look at the most recent information on a report. So, if you've paid your accounts on time for the last two to three years, the lender may ignore a series of late payments from five years ago.

Set a budget and live within it. In the age of self-help and empowerment, managing your finances should top your list.