Establishing Good Credit

So you don’t have any credit to speak of, but you have big plans for the future.  Maybe you’re a fresh college graduate or a young person eager to buy your first new car. 

If you have never had to use credit before, first of all BRAVO!  Of course, it’s best to pay cash for the things you need so that you don’t have to worry about credit card payments, loan payments, or interest rates.

But if you’re young, the chances of you needing credit in the future are very real.  Someday you might want to buy a house.  Perhaps you’ll want to buy a new car. 

Chances are pretty good that you won’t have the cash outright to buy these high ticket items which mean you’ll need credit.  Plus, it’s always good to have a little credit since many utility companies will look at your credit to turn on your power bill, for example, without a deposit of some type.

When you’re starting fresh with no credit history at all, here are a few ways to get a good start on establishing good credit:

1. Pay your bills on time, especially mortgage or rent payments. Apart from extreme circumstances like bankruptcy or tax liens, nothing has as big of an impact on your credit history as late payments. 

2. Establish credit early. Having clean, active charge accounts established many years ago will boost your score. If you are averse to credit, on principle, consider setting up automatic monthly payments for, say, utilities and phone on a credit card account and locking the card away where it's not a temptation. 

3. Don't max out available credit on credit card accounts. Lenders won't be impressed. Instead, they are much more likely to assume that you have trouble managing your finances. Beyond one or two credit cards, it starts to get complicated. 

4. Don't apply for too much credit in a short amount of time. Multiple requests for your credit history (not including requests by you to check your file) will reduce your score. If you are hunting around for good loan rates, assume that every time you give your Social Security number to a lender or credit card company, they will order a credit history. 

5. Be neat and consistent when filling out credit applications. This will insure that all your good deeds get recorded in a single file, as opposed to multiple files or, worse, someone else's file. Watch out for inconsistencies in use of "Jr." and "Sr." 

Check your credit history for errors, especially if you will soon be requesting a time-dependent loan, like a mortgage.

One great way to start establishing credit is to apply for a store credit card (Sears, JC Penney, etc.).  Once you get the card, make a few small purchases and pay them off completely.  Do this a few times over the course of a year and you’ll find yourself with some established credit with an excellent payment history.  DO NOT go overboard and buy more than what you can pay for, though. 

You can also apply for a secured credit card.  These cards ask that you place a certain amount of money in your account for which you will receive a charge card.  Then you can make purchases up to the amount of money that is in your account.  Credit reporting agencies treat these cards just like regular credit cards and look to them as a responsible way for you to establish a good credit history.

You will have to have a checking account to establish credit.  This lends to your credibility with lenders and shows that you are able to manage your money effectively.

When applying for a credit card of any type, be sure to ask if they report to any of the credit reporting agencies.  As we’ve said before, they are not required to do so, and if they don’t, having one of these cards or loans won’t do you a lick of good even if you do make your payments on time.

You can also establish credit by making a purchase or applying for a loan with a co-signer.  A co-signer is a person with good credit history who is basically telling the lending company that they will be responsible for making sure you make your payments on time.  Often a co-signer is a relative such as a parent.  This can be a risky proposition for them, so know that they are putting their own credit history on the line just to help you out, so don’t let them down.

When applying for a loan, such as a car loan, it can also be helpful if you have a large down payment to make thus lessening the amount of money you have to borrow.  This shows the lending company that you have the ability to save and they are more likely to take a chance on you based on this factor alone.

So let’s do a quick review on how to establish a good credit history: 

• Apply for a store or gas credit card and make a few charges 

• Ask a loved one to co-sign on a loan 

• Find a respected secured credit card company 

• Open a checking account 

• Don’t apply for too many credit cards in too short of a time 

• Check your credit report for any errors 

• Go slowly 

• Don’t overspend 

• Make sure your lender reports to at least one of the credit reporting agencies 

• MAKE YOUR PAYMENTS ON TIME!!!!!!! 

Of course, the last one is the most important in establishing credit.  If you don’t make your payments on time, it won’t make a hill of beans worth of difference what you are trying to do.  This is what makes your credit history worthwhile – making on time payments and showing you are responsible with your credit and your creditors.

So, what if you’ve already had credit, but you’ve made some mistakes over the years finding yourself with bad credit?  Is all hope lost?  The good news is – NO!