Establishing Credit in 3 Steps

There are lots of reasons why you might be looking to establish or re-establish credit. Maybe you're a recent college grad, a newly arrived immigrant, or someone who just went through a divorce. Or perhaps your dog used to eat your mail, causing you to pay your bills late...or not at all. Whatever the case, there are a few things you can do to establish credit even if you don't currently have any credit cards or loans.

Step 1: Open an Account

Open an account, preferably a checking account. By paying bills via check and not overdrawing your account, you begin to prove that you may be a good credit risk. Keep your monthly statements as proof that you're a good money manager.

Step 2: Get a Secured Credit Card

Secured debt is backed by some form of collateral (usually a savings account with the same institution that grants you the credit). The money deposited with the lender sits untouched unless you miss a payment or file bankruptcy, in which case the credit union or bank may be able to seize the assets in your account. This account gives the credit union or bank the confidence to take a "risk" on someone who doesn't have an established credit history.

"... there are plenty of companies that offer secured credit cards with no application fee"Don't be persuaded to pay a high fee just to gain access to a credit card -- there are plenty of credit unions and banks that offer secured cards with no application fee. Go to Consumer Action for information about building credit with secured cards, and to get a current list of available secured credit cards. If you have trouble getting a secured card on your own, as a last resort consider having one of your family members with good credit cosign your credit card application. Be aware that if you miss a payment, the credit union or bank would demand payment from your cosigner, guaranteeing, at the very least, a strained relationship between you and your family member.

Not everyone qualifies for a secured card. If you've filed bankruptcy recently, you may be rejected.

Step 3: Document Your Payments

"... you may be able to prove your creditworthiness by providing proof of timely bill payments."If you're already paying rent, utility bills, childcare expenses, student loans and so on, you may be able to prove your creditworthiness by providing proof of timely bill payments. Keep good records and ask for letters of recommendation from the individuals and businesses you make payments to. Then use them, plus proof of income, to convince a prospective lender that you are responsible enough to pay your bills in full and on time and would be a good credit customer.

A Few Final Words of Advice...

• Be patient. It takes time to establish credit.
• Always shop around for the right deal.
• Learn about credit products and terms, and your rights and responsibilities as a borrower. The best way to avoid being taken advantage of is by being well informed.
• Once you do get a credit card, make only small purchases on it -- ones you're absolutely sure you can repay on time.