Establishing Credit

Establishing new credit can be hard for some particularly when it comes to those who’ve not had any credit record.

How do you go about establishing credit? You should look into applying for a department store or gas charge account. These types of accounts will generally start you out with a small credit line of $500 to $1000.

Once you’ve opened up a new account, it’s important to take the time to develop a credit record by borrowing against the account, and paying a little more than the minimum payment each month. There’ll be some that will tell you that you should pay off your entire balance each month. However, if you’re trying to establish new credit, this is perfectly fine. If you pay off the entire balance, this will not show creditors that you’re responsible with handling payments on a monthly basis.

You want to demonstrate to creditors that you’re able to make payments on time on a monthly basis. The general rule of thumb is to establish an account with one or two creditors for about 6 to 12 months. This will show that you’ve established a consistent payment pattern and that you’re responsible.

If you happen to be a student and just starting out, and perhaps are worried about whether or not you can handle credit wisely – you may want to look at saving up money and applying for what they call a “secured credit card.” What is a secured credit card? It’s a card that you pledge a savings account for a specified amount that’ll be equal to or similar to your established credit line.

For example, if I want to apply for a secured credit card, I may want to give a bank $500, which they’ll hold as collateral. In exchange, the bank will give me a credit limit in the amount of $500. I’ll have the ability to establish a credit rating with the bank, as this will be reported to a credit bureau. However, if I don’t feel comfortable with handling credit, the $500 will allow me to not default because the bank can take that away if I do not make my payments on time or should fail to be responsible.

If you’re going to be purchasing a car or need to borrow a larger sum of money, than a creditor will most likely ask for a co-signer, which is usually a parent or a close relative.

The dangers of co-signing, is that if the person who is borrowing the money neglects to pay on time, this can have a negative impact on the co-signers credit record. If the borrower fails to make payments as agreed, the co-signer can be held responsible for the entire debt, even if the person who borrowed the money has the means and ability to pay. By being a co-signer, you assume the responsibility of the borrower. That’s why you should always be careful about co-signing a debt for anyone because it can have repercussions. If you’re going to ask someone to co-sign and they agree to do so, you should make sure that you’re able to make the payments. Otherwise, you’re not only hurting your credit, but also the person who tried to help you in good faith and that can jeopardize a relationship. So think very carefully about which step may be best for you when it comes to establishing credit.

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