Why Establish Credit

In this day and age, just about every facet of life is connected to your creditworthiness. It's not just about buying a home or car anymore. Employers check credit reports to see if you are trustworthy. Insurance companies tie premiums to your credit rating. Even landlords check credit ratings to see if you pay your bills on time. Establishing credit helps you get the best deals of life's big purchases. Having active credit cards is also required for renting cars, opening video store accounts and other important matters.

Using Credit Cards to Establish Credit

Americans are literally drowning in credit card debt, but that doesn't mean that credit cards are inherently bad. Credit cards can be an important tool in establishing credit. Credit for students is readily available thanks to the number of companies that solicit college students because their bright financial futures and tendency to remain loyal to their first card issuer. Before you apply for a credit card, though, check the terms. What is the interest rate? Is there an annual fee for the credit card? If so, what is it? What are the late fees? What is the grace period? And if you don't know what a grace period is, you probably shouldn't apply.

Resources for the Consumer

If you are just starting your journey into financial independence, beware! There are so many pot holes, frost heaves, detours, and dead ends it's a wonder anybody is able to retire these days. But don't despair! There are informational Web sites available to help you understand the basics of establishing good credit, and various books available on the subject. In most cases, guidance books are divided up by chapters and you can simply flip to the section you need information on.

About Business Credit Accounts

Establishing business credit is similar to establishing credit for personal uses. Open a business checking account. Apply for a business credit card to track your business expenses and keep them separate from your personal expenses. Eventually, you'll probably need to apply for a business line of credit to help you grow your business, meet extraordinary, unanticipated business expenses, or cover cash flow crunches. By starting small and developing a steady business relationship with your bank, the way will be paved for you to do so down the line. You may also want to consider applying for a business loan backed by the U.S. Small Business Administration (SBA). The SBA, aside from other functions, offers guarantees to lenders that might otherwise not approve a small business owner for a conventional loan. For more information on available loans and qualifying criteria, visit the SBA's Web site.

Putting Credit In Your Own Name

Establishing credit in your own name is a must, particularly for women. It used to be that when a man and woman married, everything from the house and utilities to the checking account and credit cards were in the man's name. But times have changed. With skyrocketing divorce rates and many women choosing not to marry until well after they've built a career and sizable nest egg, women need to maintain control of their own financial futures. Apply for a credit card in your own name. Then use it and pay it off on time. You can also apply for a personal loan or auto loan in your own name. The key is to make sure the accounts are in your name only and that you pay the bills on time. Just be carefull when you are dealing with joint or co-signed accounts. Any negative records from these accounts will appear on both people's credit reports.

Credit Cards and Your Credit

The best way to establish credit is to open a credit card and use it responsibly each month. Secured credit cards, student cards, gas cards and retail cards are all good options for new borrowers.

Using a Loan to Establish Credit

Credit for students can be relatively easily established thanks to credit card issuers targeting this segment with student card programs. College students can also establish credit through student loans. Most college-bound seniors qualify for federal and other student loans that, if applied for in their own name, go miles to establishing credit. A history of on-time student loan payments is a benchmark of creditworthiness. For those who do not qualify for student loans or are not attending college, a small personal loan may be available to you through your local bank or credit union. However, some loans require application fees, and all loans require interest payments. As with all credit, it is imperative that you make your loan payment on time to build a record of responsible money management.

When You Need a Co-Signer

If you don't have an established credit history, or if you do have an established credit history but it has some dings, you may need a co-signer to get approved for a loan or credit card. By co-signing a credit application, the co-signer is agreeing to assume responsibility for the debt should you, the primary borrower, default on your agreement to pay the debt. Getting a loan with a co-signer can be a risky means of establishing credit. Do not consider bailing out on your responsibility just because you have a co-signer, however. Failing to pay according to the agreed upon terms will mar your credit history for years to come, limit your future access to credit, and potentially permanently damage an important relationship with your co-signer. If you take out a loan with a co-signer and do run into financial difficulty, you need to speak with your co-signer and lender immediately to set up payment arrangements that are agreeable to all.