Understanding Credit Cards: Building Credit for Newbies

by Amy Lillard

Credit and credit cards are an integral part of our economic system today. But there is a lot of misinformation and misunderstandings about credit. In this continuing series, we examine key concepts, tips and best practices when it comes to credit cards.

(10/15/2012) To be considered a good consumer, one worthy of obtaining favorable car loans, mortgages, and credit cards, you need to build your credit profile. Lenders look at many factors when considering if you are a good candidate for a loan, and perhaps most important among them is your credit history. Building credit then is a matter of providing your trustworthiness as a customer.

For those new to credit like young adults, those getting ready to apply for a major loan, or those trying to repair their profiles, building credit is an essential process. Some good methods of building credit include:

• Secured credit cards. Banks and credit unions may offer these products because it represents little risk to them — consumers deposit money to their account, and can then spend up to that amount. It combines the concepts of debit and credit cards into an easy option that can demonstrate to lenders the ability to spend within limits.

• Co-signers. A co-signer is an individual with an established credit record that applies for a credit card or other loan with you. A common example is young adults enlisting their parents as co-signers, who effectively vouch for their children and act as a backup in case something goes wrong. Co-signers are financially liable if the main applicant defaults or is late on payments — those who ask for co-signers and those who agree to be one must be aware of the responsibilities and consequences.

• Layaway. Many retailers, like furniture stores, mass market stores (Kmart), and others, offer a “layaway” program in which consumers pay a certain amount each month until the total purchase amount is reached. These are often easier to qualify for than credit cards and other loans, and help demonstrate ability to pay over time. If you opt for a program like this to build credit, ensure the retailer reports the loan to major credit reporting agencies.

• Choose wisely. Once you begin to build credit, you’ll probably begin to receive offers for credit cards. Banks, credit card companies, and even retailers will want to loan you money as a good borrower. Don’t open an account with every one — only borrow money through credit cards and loans when you really need it, and when it benefits your credit.

• Be responsible. When you get credit, use it well. Make purchases for which you can afford to repay. And always make payments on time. When you do this, your credit is built slowly but surely.

For Additional Reading:

Raise Your Credit Score to 740: http://money.msn.com/credit-rating/raise-your-credit-score-to-740-weston.aspx

Building a Better Credit Report: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre03.shtm

6 Ways to Build Up Your Credit:
http://www.smartmoney.com/spend/family-money/6-ways-to-build-credit/