How to Establish Credit

Have you have found yourself in a situation where a creditor says to you, "Sorry, we can't offer you credit or approve your application because you have no credit history". It's the same thing as saying we can't offer you a job because you have no previous experience. The question is, "how can I get previous experience if you won't offer me a job" and how can I get a credit history if no one will approve my credit application.

Don't despair, there are things you can do get yourself on the path to establishing credit.

Get a secured or partially secured credit card. Possibly from your credit union or a bank. Bank of America is known to offer such credit cards and so does companies like Capital One, Bank One and MBNA. Unlike a normal credit card where your credit limit is assigned to you based on risk, with secured credit cards, you will have to put down money in the form of a bank deposit into your account. Your credit limit is the amount of money you have as collateral. For instance, if you deposit $1,000 they would give you a limit of around 500-900 dollars. You make payments just like a normal credit card. If you miss a payment, which you shouldn't, they take it from your deposit. Because you're borrowing against your own money, lenders are a little more willing to take on an applicant with a low credit score

Another great thing about a secured credit card is that your excellent payment history is being reported to one, or probably two, of the three major credit bureaus, and your credit score is being improved.

After establishing a history of using your secured credit card responsibly, by paying on time and not going over the limit, your lender is likely to upgrade your card to a regular (unsecured) credit card with a higher limit.

A secured credit card isn't a guarantee for better credit, but with disciplined use it can be a helpful tool in establishing or repairing your credit. By making on-time payments and paying the balance in full each month, you'll show your responsibility level and credit worthiness to the card issuer and the credit reporting agencies.

Start a savings account at a local Credit union or Bank. Save on a regular basis $15.00 a week for about 3 months. Then ask for a small signature loan of about $500 - $1,000 and put that money in your account. Remember this money does not belong to you and has to be paid back. Pay the debt out of the account. Make the minimum payments and remember never pay late. If you feel you might forget to make the payments, have the bank setup a direct debit from your account. When the loan is 75% paid, then send in a check for the balance to pay it off a little early. By making the regular payments to the bank on time, you're building good credit.

Note: To get the best interest rate, try credit unions and small, local banks. These institutions tend to be more competitive than larger banks.

During this period that you are trying to establish credit, Do not apply for any credit cards. Resist the temptation to apply for that store card because you want that free handbag that comes with the credit application. Remember whenever you apply for credit, the lender looks into your credit file, and you get what's called a "hard Inquiry". If you have a lot of hard inquiries it looks bad and lowers your credit score.

Just make sure every bank or creditor you deal with reports to the credit bureaus. If you are not sure if they do, just ask. And if they don't, just find another creditor.

Once you follow these steps, it's just a matter of time before you start building credit. Remember one of the key factors in your credit score is the length of time your accounts have been established. Another is your payment history, which is why it is so important to always pay on time. The most important thing is to be responsible and use credit wisely. Never, ever, ever borrow more than you can afford to pay back, otherwise, you can get in deep trouble really fast. and not be able to get out.

How can I add favorable information to my credit report?

When you’re trying to build a good credit history, don’t forget to take credit where credit is due. The Fair Credit Report Act allows you to add information to your report when the absence of any information could lead to the denial of requested credit. The credit reporting agency may charge a small fee for this service.

If your credit history has little or no entries to show your creditworthiness, consider adding unreported repaid debts utility payments, and rent payments. Send a certified letter to the credit bureau asking that they contact the creditor and ask for approval to list the account.

Some documents on this page are available as printable PDF files using Adobe Acrobat Reader. If you do not have Adobe Acrobat Reader, download a free copy now from Adobe.