Establishing a Good Credit History

Here's how to establish good credit and tips to choose the right card...

Establishing credit is a time-consuming task and it can be a very frusterating process. The easiest way to begin establishing credit is to open an individual savings and / or checking account. A bank account will not directly affect your credit score, but the account activity will demonstrate your ability to handle money responsibly. Next, you'll have several options to consider:

Apply for a credit card and use it responsibly. Many options are available if you have little or no credit history. While they tend to include extra fees and higher rates than regular credit cards, secured and unsecured cards are great for building credit. And prepaid cards allow you to establish credit on a pay-as-you-go basis. Department store and gasoline cards, which are generally easy to obtain, are also great choices.
Apply for a small loan or line of credit from your local bank. Repay the loan promptly and on time to build a positive credit history and earn a good credit rating. To get a loan without a co-signer, you must be at least 18 years old and have a steady source of income. Increase your chances of getting the loan by coming up with a large down payment.
If you don't qualify for credit on the basis of your own credit file, consider asking someone with an established credit history (like a parent) to co-sign your application. But be aware-- if you fail to repay, the co-signer promises to do so on your behalf.

Before you apply for any credit, however, make sure you understand the terms. For example, how long is the grace period or the time you have to pay the current balance in full before finance charges are added? Is there an annual fee or other fees associated with the line of credit? If you believe that you'll carry a balance, you need to know how finance charges are calculated.

Patience is important. It takes time to establish credit and build a record of consistency in making payments to demonstrate your creditworthiness. And it is much better to go slowly and develop a strong credit record than to apply for too many credit cards or a loan that is larger than you can handle. Start slowly, be cautious, keep track of your overall debt, and pay on time. Most importantly, remember that credit represents real money and has to be repaid with interest.

Choosing the right credit card

Consumers are presented with a wide array of credit card choices-- credit cards with 0% or low APR, special reward deals, gold cards, platinum cards, etc. So, how do you choose the right credit card when you have little or no credit?

For individuals trying to establish credit, your options are limited. But there are several great choices available. These credit cards are an effective way to build and improve your credit history.

Secured credit cards are available to most individuals. They require a security deposit (normally between $150 and $300) to receive approval. Your credit limit will be equal to your deposit.

Unsecured credit cards are similar to normal credit cards and do not require a security deposit. But they include additional fees.

Prepaid credit cards are an alternative to secured / unsecured cards. They operate on a 'pay as you go' basis and approval is guaranteed. But be sure they report to the credit bureaus.

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Please Note: Both secured and unsecured cards tend to have higher rates and additional fees as compared to standard credit cards (for good credit).

If you've already established a track record of good credit, there are many additional options available! To find more information about the different types of credit cards available and how to choose, please visit our How to Choose a Credit Card article.

If my application is denied

If you've been denied credit for any reason, you should receive a written explanation from the financial institution describing the reasons for your denial. If you were denied because of information supplied by a credit bureau, federal law requires the creditor give you the name of the bureau that supplied the information. You have 60 days to contact the credit bureau if you would like a free copy of your credit report. If you find an error in your report, you are entitled to have it investigated by the credit bureau and corrected at no charge. However, if negative information on your credit file is accurate, only time and responsible credit habits can help restore your credit history.

It's important to note that financial institutions must make credit equally available to all creditworthy applicants. Under the Equal Credit Opportunity Act, you have certain rights that protect you against unfair credit discrimination. Under this Act, you cannot be denied credit because of:

Age (unless you are under 18)
Sex
Marital status
Race
Religion
National origin
Income derived from public assistance
Intent to have children
Birth control practices

You can only be turned down for credit based on:

Your credit history
A current or former spouse's credit history
Other financial information

If you suspect discrimination by a bank, savings and loan or credit union, ask for the name and address of the federal agency that enforces the Equal Credit Opportunity Act. The Equal Credit Opportunity Act mandates that the creditor must give you this information. Not every institution can act on your individual case, but they can track your complaints, along with other similar ones, in order to find a pattern of discrimination.

If you suspect discrimination by a retail or department store, finance or mortgage company, utility, state credit union or government lending program, contact:

The Federal Trade Commission (FTC) cannot intervene in individual disputes. However, the information you provide can show patterns of discrimination in which the FTC can act.

You can also direct complaints against all types of creditors to:

Responsibilies as a cardholder

While credit makes it easy to purchase things without cash, it's easy to lose track of how much you're spending if you're not careful. And if you don't pay your bill in full, you'll probably have to pay finance charges on the unpaid balance. If you continue to charge while carrying a balance, your debt can snowball out of control! Before you know it, your minimum payment is only covering interest charges. This could have a sizable impact on your life! If you have trouble paying your debt, it will eventually become more difficult to finance a car or home, get insurance, and even get a job.

To establish and maintain good credit, it is important to pay at least the minimum amount due every month and to pay on time. Allow five to seven business days for payments made by mail. Use your credit card wisely as a beneficial financial tool. Do not fall into the trap of charging every item you buy just because you can. This will leave you with a huge debt you can't afford.

There are easy ways to keep your spending on track. Perhaps the easiest is to record your credit card purchases in a notebook. There are also a wide variety of software programs, such as Quicken®, available to help you manage your finances.

Lastly, take advantage of the services your financial institution offers. Through online banking, for instance, you can see your account activity on a daily basis and even arrange to make electronic payments over the Internet.

* See Credit Reports or Credit Monitoring for related products.