How to Establish Credit

If you don’t have any credit and you want to establish it, you’ll need to go a step further than using alternative-credit sources such as telephone and cable television bills. To establish credit, you need to buy something on credit, then make your payments on time, every time. That’s it.

But how can a person establish credit if no one will grant credit without a prior credit account? It’s true that there are certain credit accounts that require a traditional credit history, but there are a couple of places to get started with a credit account. The first place to begin is most likely at a department store. Many department stores offer credit accounts and are willing to issue credit to first-timers. Don’t expect a credit line in the stratosphere, though. Your first credit account is likely to have a credit limit of $250 to $500. Another option is to apply for a credit account from a gasoline company. They too may issue credit on a limited basis to those without a history. But if you’re having trouble or would rather not wonder whether or not you’re going to get a credit card, then go to your bank and open up a secured credit card account.

A secured credit card is just like any other credit card in that it has a credit limit and when you charge something on it, you have to make monthly payments to pay it off. However, instead of having an open credit line with no collateral, you ‘‘secure’’ the card with cash up front.
For a secured credit card, you will need to make a cash deposit of anywhere from $250 to $5,000, whatever you choose or the bank requires, into a collateral account. This cash deposit acts as a ‘‘backup’’ for the bank in case of default on your part.

If your deposit is $1,000, then your credit line will be $1,000. You will then be issued your first credit card, and it will look just like any other card. When you buy something on the card, you will get a statement in the mail each month showing the required minimum monthly
payment.

The minimum monthly payment is your contractual obligation to pay the bank back. If you charged $100, then your minimum monthly payment could be, say, $18.00. Your minimum monthly payment is a function of the interest rate attached to your card account.

You can pay the minimum, which includes the interest or finance charge, or you can pay a little more than that or you can pay the balance in full. It’s up to you, but you need to pay at least the minimum required on or before the due date.

Most card accounts give you 25 to 30 days to make a payment by the due date, although some cards ask for the money a lot sooner. Pay very close to that due date and don’t be late; if you are, you will be establishing bad credit.
Ithe late payments show up on your credit report, showing how many payments were more than 30 days past due, 60 days past due, and so on. Those notations are for credit-reporting purposes, and lenders use them as an accepted guideline when determining ‘‘good’’ or ‘‘not so good’’ credit.

Be warned, however: Even if a payment to a credit account is less than 30 days past the due date, if it is as little as one day past the due date, the credit issuer will most likely penalize you by increasing your interest rate to much a higher level. Pay the account before the due date and you won’t have those problems.

Most secured cards will return your cash deposit to you after 12 months of on-time payments and keep your credit line the same as the original amount. Continuous on-time payments and responsible credit usage will soon be rewarded with an increased credit limit (if that’s what you want, of course).

After you’ve opened up your first credit account, you may apply for another credit account after three to six months of use. Be careful though; just because credit is available to you doesn’t mean that using it is a good thing. Many a folk have gotten themselves into credit hot water, or worse, by opening up and using too many credit lines.

When you’ve established a track record with a credit account, you need to make certain that the lending institution is reporting your payment history to the credit bureaus. To find this out, simply ask about it while you’re applying for the credit account. If the institution doesn’t report, you may want to try another bank. Odds are that almost every bank will report your information, however. After all, they’re members, of the credit bureaus, too.