Establishing Credit History

How do you establish your credit history?
Even if you've never made a major purchase, there are ways to start building a good credit history. If you've never had credit in your own name, it can be difficult to get a car loan or credit card. Having no credit history can be as much of a problem as having a bad credit history. Students, other young peole, and newly divorced or widowed women who have always obtained credit jointly with their husbands often find themselves in this situation.

It seems like a vicious circle: you can't get credit because you've never had credit, but you've never had credit because you can't get credit. What's a person to do?

Don't despair. Here are a few tips to help you establish credit in your own name.

The best way to establish a credit history is to apply for a small loan or line of credit from your local bank or a credit card from a local department store or with a large oil company such as Chevron, ConocoPhillips or Exxon Mobil. In general, the credit standards for opening an account with large oil company are not as stringent as those required by major credit card companies, such as Visa, MasterCard or American Express.

Before you open a account

Ask whether they report to a credit bureau. If they don't, having the card or loan won't help you establish credit.

Monitoring Your Credit Record

If you don't qualify for credit on the basis of your own credit file, ask someone with an established credit history (like a parent, relative) to co-sign your application. Remember, the co-signer promises to pay your debts if you don't.

To get a credit card without a cosigner, you must be at least 18 years old and have a source of steady income. Gas cards are relatively easy to get. Apply for one and use it to establish credit, but pay it off every month to show that you can pay your bills responsibly.

If you are a full-time student, make sure to include that information on your credit application. Creditors often assign full-time students lower initial credit lines to start their credit files. As you advance through college and graduate school, you can always request increases to your credit line.

Before you submit a credit application, get a free copy of your credit history to make sure it's correct. Contact a credit bureau listed in the Yellow Pages under "credit rating and reporting."

Increase your chances of getting the loan you're applying for by coming up with a large down payment. If you don't have the cash, consider borrowing from a family member. There are many businesses waiting in line to take advantage of you by charging exorbitant fees or interest rates, so be careful out there. If you don't have a checking account, open one. You have very little credibility with lenders if you don't have at least a checking account and preferably a savings account as well.

Just as importantly, be sure not to overdraw your bank account. Bouncing checks sends a signal to potential lenders that you can't manage your daily finances and are therefore not a good credit risk.

Know what lenders and credit card issuers look for when issuing credit. There are other factors that affect credit approval besides just your payment history, such as how often you move and how often you change jobs. It also helps if you've had an apartment or utility in your own name. If you don't have a telephone number in your own name, you may find it more difficult to get credit.

If worse comes to worst, you may find it necessary to get a secured credit card. These cards require you to deposit money in an account to secure the loan or credit limit, and they often have fees and higher interest rates. If you default on your payments, the lender takes the money from your account. After a few months of making payments on time on the secured credit card, you may be able to obtain a regular credit card. Remember to make sure the company reports to a credit bureau before applying for a secured card, or the card won't help you establish a credit history.

Before you apply for a credit card or car loan, get your ducks all lined up. Think like a lender. Applying to a number of credit cards in a short period of time can decrease your chances of getting approved. Lenders see this activity on your credit report and steer clear because they think you're getting in over your head, so pick and choose carefully and have a plan of action.

Remember: A credit card isn't free money, and you must use it wisely. Keep monthly charges small—some recommend no more than 30% of the credit limit—and pay the amount due in full each month. Being rejected for credit can also look bad. Apply only to cards whose requirements you are likely to meet. Read the small print and call the company to make sure your income and other factors qualify you for the card. Just because you get an offer in the mail doesn't mean you qualify.

With careful planning and a little knowledge of how lenders issue credit, you CAN establish a credit history fairly painlessly.

AVOID (Don't)

  • Don't overdraw your bank account. You will be charged fees, and you can damage your credit record.
  • Don't miss payments on bills or loans. Even late payments count against you.
  • Don't let other people use your bank account, credit card, debit card or ATM card. You are responsible for what they do with it.
  • Don't leave utilities (gas, water, phone, electric) in your name if you move. Always close out or transfer all accounts before you move. If accounts are in your name, they're still your responsibility.
  • Don't forget to account for recurring bills on your credit card, such as subscriptions or club dues.

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