Steps to Establishing or
Re-establishing Your Credit

Having credit is an asset and can help provide you with a great deal of financial freedom. There are several steps to begin:

  • Open a checking and/or savings account.
  • Have a record of stable employment
  • Live in your current residence for at least six months.
  • Open a charge account with a local department store or apply for a gasoline credit card.
  • Consider taking out a small loan from your bank or credit union.
  • Open a secured credit card.

    • A secured credit card is one that you secure with your own funds. To obtain this type of card, you deposit a specified amount of money in a financial institution. The bank will then issue you a credit card. The amount you deposit is your credit limit.

    Choosing the Right Credit Card

    When choosing a credit card you must first consider how it will be used, and how much debt you can afford. Ask yourself the following questions:

    1. Will you use it for regular purchases, or for emergencies only?

    2. How much can you pay each month when you get the bill?

    3. Are you going to carry a balance and for how long?

    There are four areas you then need to compare when selecting the card: Annual Fees, the Annual Percentage Rate (APR), Grace Period, and Late Fees.

    Annual Fees

    Some credit cards are issued with an annual fee, and some do not. You will want to look for a card that does not charge any annual fees or the fees are minimal. Determine all fees being charged by each of the cards you are considering.

    Annual Percentage Rate (APR)

    The APR can vary dramatically from card to card. Typically, the rate you are offered will be related to your credit history. The better your history, the lower rate you will be offered. Be sure to read the fine print. Many cards are offered with a very low APR, but this APR may be for a limited start-up period. Further, the APR may jump to a very high rate the moment a payment is received even one day late. An exorbitant late fee may also apply.

    Grace Period

    You also need to determine what grace period the card will offer you. Some cards have no grace period and will begin charging finance charges the day your purchase is made. Avoid these types of cards. Cards that have a longer grace period will enable you to save the money needed to pay your charges in full each month. In this case, the APR is not important, unless you take cash advances, which are treated differently.

    Late Fees

    One last thing you should look at is how much of a fee the credit card will charge for late payments or if the account falls over the limit. These types of fees can be costly and make it more difficult to pay the balance off. These fees can vary dramatically from card to card. Of course, if you make all your payments on time, this becomes unimportant.

    Steps to Establishing or Re-establishing Your Credit

    Credit needs to be used wisely. You need to ask yourself: “How much credit can I afford?” The rule of thumb to follow is no more than 20% of your net income for consumer debt; excluding mortgage or rent. The key to establishing a good credit rating is to use your credit in a responsible manner and make on-time monthly payments.
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