Establishing Credit

It seems as if you have to have credit to get credit. That's true in a sense, because financial institutions usually check your credit history to help them decide whether to grant you credit. Your credit history is a written description of how you handle credit.

If you don't have a credit history or bad credit, there are ways you can establish or re-establish your credit:

	Apply for a local store's charge card or a small loan at a local lending institution such as Federal Credit Union.
	Get a checking account and/or savings account
	Rent-to-own stores offer items such as televisions, washers and dryers, refrigerators, couches, and more. They set up short-term rental-purchase agreements. No down payment or credit check is usually required. The renter pays over time to "rent" an item. If the renter makes all the required payments, the renter then owns the item. Generally, these stores will report to the credit bureau.
	Secured Credit Card are major bank credit cards tied to a savings account you hold at the same bank. The money in your savings account is your credit limit. The savings account acts as a security deposit for your credit card. Secured credit cards work and look exactly like regular bankcards.
	Being an authorized user for a credit card on someone else's account is always a good way to establish credit without ever making a payment. An authorized user is able to use the credit card but can not be held responsible for making the payments.  As long as the person who is responsible makes his/her payments on time, it generally will be reported to the authorized users credit bureau.  In the event, the payments become delinquent, you will be able to remove it easily since technically nothing should be reported to the an authorized users credit bureau. If you do have a problem just refer to the fair credit reporting act.

Make sure that if you decide to purchase an item from a rent to own store or get a secured credit card that they report to the credit bureau so when you make your monthly payments on time, they will be reported. 

Your Credit Score

Today, computers are usually used to calculate your credit score. Your score is determined by assigning points to such things as your income, how long you've been in your current job, what your work is, whether you own your home or rent, how much credit you have, and more. It boils down to the three "Cs":

1. Character. Creditors believe that people with "character" will pay their bills even during difficult times.
2. Capacity. Your ability to get credit is based in part on your ability to repay your debts.
3. Collateral. These assets reflect how you'll repay debts if your capacity fails. Unlike a mortgage or car loan, credit card debt is unsecured. Your signature is your promise to repay the debt.

Different lenders (or their computers) will look at your situation and score you differently. Therefore it is smart to apply again if you've been turned down. But here's an important tip: don't apply too many places at once. When you apply for credit, this is recorded on your credit report as an "inquiry." Your report lists all the inquiries made by creditors, and too many at once will cause your credit score to go down. Creditors may think that you could have too many open accounts and become overextended.

Credit Scoring

Ever wonder how you really rate with creditors? As you know, creditors want to know whether you will be a good credit risk. To help them figure this out, most creditors use scoring systems they have designed over time. Here's how the system works.

Information about you and how you've used credit in the past (your bill paying history, the types of accounts you have, whether you make late payments), is collected from your credit application and your credit report. Scoring models may also consider your job or occupation, length of employment, and whether you own your own home. Creditors use a statistical program to compare this information to the credit performance of similar consumers. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. The total number of points the credit score helps predict how creditworthy you are.

How Can I Improve My Credit Score?

You may wonder how you can improve your credit score. Credit models are complex and vary widely, so it is better to look at general action you can take, rather than trying to change your score with one particular creditor. These tips can help improve your score:

	Pay your bills on time. Payment history is usually a significant factor in your credit score. It will hurt your score if you pay bills late, have had a bill referred to collections, or have declared bankruptcy.
	Look at your outstanding debt. Many scoring models look at the amount of debt you have and compare this to your credit limits. If the amount you owe is close to your credit limits, this may hurt your score. Paying down your outstanding balances can help your score. Also, try to avoid new debt.
	Give it time. It will help your score if you have a longer track record with credit. Having a fairly new credit history may hurt your score, but this should be offset if you make timely payments and keep low balances.
	Don't apply for too much credit at once. If you have too many "inquiries" on your credit report, indicating that you have applied for credit with different creditors, this could hurt your score. (Remember, not all inquiries are counted. Inquiries by creditors monitoring your account or offering "prescreened" credit cards are not counted.)
	Look at your current accounts. Although a track record is good, having too many credit card accounts can hurt your score. In addition, many credit scoring models look at the types of accounts you have. For example, loans from finance companies may hurt your credit score.

Get Turned Down

If you are turned down for credit, ask why. The federal Equal Credit Opportunity Act requires that the creditor give you an explanation, though sometimes you have to ask for it. You may find that the creditor believes your salary is too low, or you haven't been at your current job long enough. Time may resolve these problems, so try again when your situation changes. Also, ask the creditor if a credit scoring system was used. If so, ask the creditor how you can best improve your chances if you apply again.

Sometimes you can be denied credit because of information from a credit report. In this case the federal Fair Credit Reporting Act requires the creditor to tell you which credit bureau supplied the information. You have the right to contact the credit bureau and get a free copy of your credit report within 60 days.

If the creditor says you were turned down because you were too close to your credit limits on your current cards, or that you have too many accounts, you may want to reapply after paying down your balances or closing some accounts.

Co-Signers

If you are a young person applying for credit for the first time, you may be able to get your first credit card by having your parents co-sign for you. You would qualify for the credit card using your parent's income and good repayment history. You can then make purchases with the credit card, and you or your parents are responsible to pay the bills.

Other people having difficulty getting credit can use a friend or family member as a co-signer as well. This is recommended as a last resort because problems may occur. The co-signer must promise to pay your debts if you don't. Even if you make regular payments, your co-signer's personal credit capacity is reduced by the amount of your credit limit. Worse, a creditor has the right to demand payment in full from your co-signer if you become delinquent in your payments. If you use a co-signer, repay your debts promptly and after a short time try again to get credit on your own.

When you are asked to co-sign a loan, consider the worst case scenario that you will be repaying the debt. Then ask yourself whether you can handle additional debt right now. People who co-sign a loan often regret it later. For example, if your girlfriend or boyfriend asks you to co-sign a loan, think twice. The debt could be around longer than the significant other. Also, many grandparents agree to co-sign car loans or student loans for their grandchildren. If the grandchild doesn't pay the debt, the grandparent is stuck with it. Before you co-sign, consider this information:

	Be sure you can afford to pay the loan. If you're asked to pay and can't, you could be sued or your credit rating could be damaged.
	Even if you're not asked to repay the debt, your liability for the loan may keep you from getting other credit because creditors will consider the co-signed loan as one of your obligations.
	Before you pledge property, such as your car or furniture, to secure the loan, make sure you understand the consequences. If the borrower defaults, you could lose these items.
	Ask the lender to calculate the amount of money you might owe. The lender isn't required to do this, but may if asked. You also may be able to negotiate the specific terms of your obligation. For example, you may want to limit your liability to the principal on the loan, and not include late charges, court costs, or attorney's fees. In this case, ask the lender to include a statement in the contract similar to: "The co-signer will be responsible only for the principal balance on this loan at the time of default."
	Ask the lender to agree, in writing, to notify you if the borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
	Make sure you get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and warranties if you're co-signing for a purchase. You may need these documents if there's a dispute between the borrower and the seller. The lender is not required to give you these papers; you may have to get copies from the borrower.