The dos and don'ts of establishing credit

There are multiple reasons why people may want to establish new credit. They may be new entrants into the world of credit, or are perhaps trying to reestablish credit after a financial hiccup. Either way, there are some do’s and don’ts that consumers should follow that will make the road to credit much smoother.

Do obtain a copy of your credit report from AnnualCreditReport.com. This is particularly useful if you are trying to rebuild your credit, as you’ll want to review what existing debts you need to satisfy before moving forward.

Do open checking and savings accounts. Even though this activity is usually not reported to the credit bureaus, lenders may inquire about the presence of such accounts on credit applications, thus it can count in your favor.

Don’t apply for too much credit at once. This can appear as though you’re desperate for credit and perhaps make lenders less inclined to extend credit to you. Further, too many credit inquiries can have a negative impact on your credit score.

Do apply for a variety of credit types. Credit scoring models value having different types of credit. Therefore, having some revolving accounts (typically credit cards) and some installment fixed payment loans (such as a car payment) can improve your score.

Do research the type of card that is right for you. Each issuer has different lending standards (yes, a credit card is a loan), so you’ll only want to apply for cards from those whose lending profile you fit. Familiarize yourself with the various standards by going to CreditCards.com or Bankrate.com.

Don’t fall for a credit repair scheme. Why pay for something that you can do for yourself for free? If rebuilding credit, know that time is your friend, as the farther you move away from the financial distress, the less negative impact it has. Follow with responsible behavior with your new credit, and you’ll soon have a solid credit file.

Don’t pay to piggyback. Piggybacking is a legitimate way to build a credit history, but only if you use it as it was intended. This tool allows someone with existing credit to add an authorized user to their account. The credit activity is then reported in the primary cardholder’s name as well as the authorized user’s name. Examples are adding a young adult on the parent’s card, or a spouse on the other spouse’s card. The wrongful use of piggybacking would be when strangers utilize this method, typically for money.

Do consider a co-signer. Obtaining a loan in the absence of any credit history can be difficult, sometimes requiring a co-signer to guarantee payment. The loan is usually structured where the primary borrower is expected to make the payment, with the pay history reported in both names. If the borrower defaults, the lender will approach the co-signer, and missed payments will be reflected on both credit files. There is somewhat of a risk to the co-signer, but if handled responsibly, co-signing can be an effective way to help another person obtain and build credit.

Do consider a secured credit card. This type of account is secured by a deposit made to the financial institution issuing the card. For example, if you wanted a card with a $500 limit, you would deposit that amount with the bank offering you the card. Know, however, that secured cards can have fees attached to them, and typically have a higher interest rate. The account activity is reported to the credit bureaus each month, and after responsibly making payments on a secured card, the issuer often offers the borrower an unsecured card.

Do take out a small loan. A personal loan from a bank or credit union can serve to establish credit. You may be asked to put up collateral, but it will be worth it in order to build your credit.

Equally as important as establishing credit is treating it responsibly. Paying your bills on time all the time ensures that you enjoy all the benefits of credit. This post was provided by The National Foundation for Credit Counseling (NFCC). Money Management International is a member of the NFCC.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.