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How to Build Credit

The Risks and Rewards of Using Credit

Your credit record reflects how well you managed your financial responsibilities over a certain period of time. Obviously, there are rewards for handling your credit well. Having a good credit report can give you the ability to:

  • Improve your lifestyle through purchases that are only possible with credit
  • Utilize services that are only available if you have a credit card — for example, renting a car
  • Have the resources to pay for unexpected emergencies

However, there are risks involved with credit. Poorly managed credit can land you deeply in debt, and recovery is not easy. You can’t restore a good credit history overnight, but you can improve your credit record over time.

The rules of credit are few and simple. A lender extends you a line of credit. You agree to pay the lender back the amount you spend plus finance charges and perhaps additional service fees. A payment schedule is set up, and you are required to make payments according to that schedule. The most important advice is to pay your bills on time.

Types of Credit Available

  • Revolving credit: Most credit cards are a form of revolving credit. This simply means you are given a maximum credit limit and you can make charges against that limit, carrying a balance and making payments each month.
  • Charge cards: While they often look like revolving credit cards and are used the same way, charge accounts differ in that you must pay the total balance each month.
  • Service credit: Often overlooked, your agreements with service providers are all credit arrangements. You receive goods (natural gas, electricity) or services (apartment rental, cellular phone use, health club memberships) with the agreement that you will pay for them each month just as you would with any other form of credit. Your contract may require payments for a specified number of months, even if you stop using the service. Your accounts with service providers and the associated payment history are appearing more commonly on credit reports. Unpaid bills are almost always reported when the account is turned over to a collection agency.
  • Installment credit: Car loans and mortgages are two examples. Installment credit is among the most common and easily understood. A creditor loans you a specific sum of money, and you agree to repay the money and interest in regular installments of a fixed amount over a set period of time, usually measured in months or years.

Using Credit for the First Time

Getting your first line of credit sometimes can be challenging. If you don’t have a credit history, or if your report has a serious blemish like bankruptcy, lenders may be reluctant to extend you credit. You may want to talk to a local department store or bank. Ask if they will open a line of credit for you for perhaps only $200 or $300.

It may be necessary to have a parent or friend with a strong credit history cosign for you. If a person cosigns on your behalf, he or she is accepting equal responsibility for the loan or credit line. Without someone to cosign, you may need to begin with a secured line of credit. To do so, you must open an account with a bank or other lending institution. In turn, you will receive a line of credit with a limit equal to a percentage of your bank account balance. Often, this type of credit has higher interest rates and fees, but it may be a good way to get your first credit card.

Tips for Using Credit

When you are extended a line of credit, use it, but use it carefully. Be certain your account is reported to a credit reporting agency. Most importantly, make your payments on time.

  • Set up a budget and stick to it. You need to be aware of how much debt you already have and how much you are adding to that debt by buying with credit.
  • Shop around for credit. Lower interest rates, lower or no annual fees, cheaper service charges and additional benefits such as frequent-flier miles or special insurance rates are available. Find the credit that is right for you.
  • Once you have signed a credit agreement, you are responsible for it unless the creditor agrees to release you from the agreement. That not only includes credit cards and installment loans, but also health club agreements and cellular telephone contracts, even if you stop using the service. Remember also that a divorce decree does not release you from responsibility for joint accounts.
  • Protect yourself from credit fraud. Treat your credit cards like cash. Sign them as soon as you get them. Don’t leave them lying around. Shred receipts that have your account number on them, and do the same with credit offers you receive in the mail but choose not to accept.
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