The Basics of Building Credit

You might think that the safest financial strategy is to always pay with cash, check or debit card. While that can help you avoid overspending, it's still important to build credit. There are a number of situations when you may need to have established, good credit, including:

• Getting utilities like electricity, Internet and cable TV, and cell phone service
• Renting an apartment or house
• Applying for a job

Of course, you also need good credit if you want to apply for a loan or credit card.

If you're just starting out and don't have a credit history, it can be a bit harder to get a credit card or loan because lenders aren't sure you're a good risk. However, there are a number of ways that you can establish credit, even with little or no credit history.

• Get a secured credit card. You deposit a certain amount of money with the financial institution in exchange for a credit card with a credit limit equal to your deposit. That way, the financial institution isn't faced with the risk that you won't pay back what you owe. Use your card to pay for groceries or other necessities and always pay the bill in full and on time. Make sure you know what fees are charged for the card and that the financial institution reports your payments to the major credit reporting agencies.
• Take out a small loan. Your credit score is based not only paying your bills on time and in full, but also on having different types of credit, so taking out a small personal loan to pay for car or home repairs, medical bills or other expenses can help build your credit. Of course, it's important that you make all your payments on time.
• Use your credit wisely. Another factor lenders consider when deciding if you're creditworthy is how much credit you have compared to how much you're using. A good rule of thumb is to use between 10 and 30% of the available credit on your credit card at any given time. Lenders are also wary when you apply for several new credit cards or loans at the same time.

Getting Back on Track and Rebuilding Credit

If you've had financial problems that have had a negative effect on your credit score, the tips above can help you start over. There are also other steps you can take to improve your creditworthiness.

• Pay down debt. If you have credit card balances or other debts, put together a plan to systematically pay off your debt. It may be easier to focus on paying down one account at a time and have a set amount of your paycheck automatically transferred to the lender every payday.
• Check your credit report and dispute any errors. Incorrect information can lower your credit score, so check all three major credit reporting agencies and follow their procedure for getting errors corrected.
• Don't cancel a credit card. This lowers your available credit, which can have a negative impact on your credit score. Instead, don't use the card daily, just use it for one or two recurring charges like a utility or car insurance bill that you would normally pay for by check.