Establishing Credit History

The best way to build credit is to use one or two credit cards, combined with a small secured loan or a student loan.

You should be aware that it takes time to build good credit. There are no shortcuts, and the sooner you start – the better.

Being approved for a credit card is easier said than done, especially if you’re young, student or working in a part time job. Fortunately – there are many good alternatives to the major league’s credit cards that will do the job of building your credit history just as good.

Have someone co-sign for you
As of February 2010, you have to be 21 and employed at least 12/18 months before getting approved for a regular card. Minimum wage or part time will not suffice. The easiest way around it is to have one of your parents co-sign with you.

It’s a lot easier to get approved on a joint credit card, because the co-signer vouches for you while you build credit. Note that this is a big responsibility – you can cause major headaches for the co-signer and ruin his score if you fail to pay on time.

Piggyback
Credit Piggybacking is an excellent way for family members to start building credit history. It is absolutely legal and Fico acknowledges it.

When you are being added as an authorized user on someone else’s credit card, the account will appear on both yours and the primary card owner’s credit report. Whenever the primary card holder makes timely payments – it appears on your report, builds up your credit and improves your score.

Secured Credit Cards
If you can’t find someone to co-sign for you, get a secured credit card instead. As with secured loans – you will need to make a deposit to your account, let the bank freeze it as collateral and get a credit card with a limit in the amount of your deposit.

The advantage of getting a secured credit card is that you don’t risk getting a rejection on your credit report that will further hurt your credit. The reason you will get the secured credit card on the first attempt is because you need to put up a deposit with the bank that is equal to your credit limit. The deposit can earn you interest and in the unfortunate event you were unable to pay your card and defaulted, the bank would use your deposit to pay the debt.

If your bank won’t let you have one – go to Credit Union or Capital One. I’ve never heard of someone not being approved by both.

Secured credit cards may have an annual fee of around $20. Consider this as an investment.
Use the card for regular purchases. You don’t need to spend much, and certainly below 50% of your limit, or even better – 35%.

Wait for the statement, and pay the balance in full. As far as credit history is concerned – it make no difference if you make a full payment or just the minimum, but it will save you a lot of money on unnecessary interest.

In about a year you should qualify for a regular card.

P.S. as I hear, there are now secured credit cards that converts to regular credit cards after 12 to 18 months of on-time payments. Inquire about them with your local bank.

Store Credit Cards
Another great option (instead of or combined with) to secured credit cards are store/merchant/retailer credit cards.
There are countless of nationwide retailers or department stores that issue their own credit cards. Macy’s, Wall-Mart, Best Buy, RadioShack, Victoria’s Secret and Maurices are a good example, but there are many more.

They are relatively easy to get, and supply the same credit building service as any other credit card, as long as you make sure that they report to all 3 credit bureaus.

Store cards don’t usually have hidden fees on them, but make sure to ask before you apply. At least Macy’s doesn’t. However, the interest rate on store credit cards is usually very high, so simply pay each statement in full.

Gas Cards
Gas station cards may work as well. These cards can be easier to qualify for and they certainly help you build credit. Don’t forget to check that they report to all three bureaus.

What’s next?
Secured and store credit cards are great to start your credit, but if you want your score above the 700 mark you’ll need to get one of the big Kahuna’s – Visa, MasterCard or American Express.

Once you have 12 months or so of on-time payments on your secured or store card, apply for a major credit card thru your bank.

General Advice

• You need to use credit if you want to build credit. But “Using credit” is not the same as “carrying a balance on your credit cards.” Carrying a balance is expensive, bad for your finances and completely unnecessary. Always pay the statements in full, avoid unnecessary high interest rates and never pay a dime of credit card interest.
• Always pay on time. A single late payment will do a lot more damage than what 2 years of timely payments can fix.
• Don’t expect overnight results. Building or repairing credit repair takes time.