Step 7: Establish a Good Credit History

Your credit report and score can affect your life in many ways. Obtaining a mortgage or car loan (especially one with a good interest rate), renting an apartment, finding a job (many employers check credit reports), and obtaining insurance with low rates is usually easier with a good credit history.

Like the name implies, your credit report tracks your credit activity. There are several types of credit, including credit cards, store cards, personal loans, car loans, mortgages, student loans, and lines of credit. Credit-related legal actions, such as judgments, foreclosures, repossessions, liens, bankruptcies, and evictions, also appear on your credit report. Your credit score is a numeric summary of the information in your credit report and is designed to measure the risk you will not repay what you owe.

In order to have a good credit report and score, you need to have credit. However, it can be hard to get approved for credit the first time since you don’t have a credit history. What can you do about this Catch-22?

A good option for many people just starting out (or rebuilding) is a secured credit card. A secured credit card requires you to put down a deposit, which the creditor gets to keep if you do not make payments. While they are typically easier to get than regular credit cards, the credit limit is usually low, and the fees can be high. However, many creditors are willing to convert a secured credit card to a regular credit card after a year or two of on-time payments.

Another option is to ask a friend or family member who has a good credit history to cosign on a loan or credit card for you. Be especially careful with this type of arrangement. Any late payments you make will not only reflect poorly on your credit report but your cosigner’s as well. After six months to a year, you may want to reapply for credit on your own.

Once you have credit, it is very important to use it responsibly. Always make your payments on time, and keep the balances on revolving credit, such as credit cards, low. Missing payments, especially to the point where accounts get sent to a collection agency (which typically happens after 4-6 months of non-payment) and carrying high balances will hurt your credit report and score. Repossessions, foreclosures, judgments, and bankruptcy are also damaging.