Use Credit Cards to Create Credit History

Good luck trying to get a credit card if you don't have a credit history! It's like trying to find a job without any job experience. Unless you're a college student, that is so. Then your college mailbox will be flooded with credit card deals for student credit cards.

There are ways to go from no credit history to a great credit report, but it takes time and patience. In the same way, if you have poor credit, you can repair it and develop a good credit report -again, with time and patience.

1. The first thing you'll need to do is to establish some stability. Get a job and stay with it for a couple of years; going from job to job makes you look flaky, even if you make more money each time you move. Rent an apartment and stay there. A credit card company will look at how long you have lived in the same place, and they will give you points for staying put.

2. Next, develop a track record of paying your bills on time. You may not be able to get a credit card yet, but you have rent and automobile insurance and utility bills. You may have to pay a hefty deposit to rent an apartment or get the gas turned on, and you may need mom and dad to help you out a little. If you pay your bills on time consistently, you will develop a reputation for being responsible. When the credit reporting agencies calculate your credit score, they look at your payment history over the past two years.

3. After a couple of years of all this responsibility stuff, you may be ready to apply for a credit card. Before you do, check with all three credit reporting bureaus and get a copy of your credit report, if you have one. (If you've avoided late payments and such, you may not have a credit report. That's okay). Make sure your credit report is accurate and get any errors corrected.

4. There are three kinds of "beginner" credit cards. You will probably be able to get one of these credit cards, and you will use that to build your good credit report.

• Cosigned credit card: You need help to get a co-signed credit card because someone else will have to vouch for you. Cosigning for someone else - even a beloved child - is risky. Think about it. The credit card company isn't willing to risk giving you an unsecured credit card. Your parent or friend or whoever is taking that risk and is, in effect, saying that they believe that you are responsible and will pay your bills.If you default on a co-signed credit card, it will ruin your credit for a long time to come. The person who cosigns for you will have to pay off your debt, and their credit report may get dinged. Asking someone to cosign for you is a big responsibility.

• Prepaid credit card: To get a prepaid credit card, you need some cash. You "fill up" the card the same way you do a phone card. If you put $1000 on the card, you have $1000 in credit. If you charge $100, you now have $900 in credit.

• Secured credit card: Here again, you need some cash to get a secured credit card. You use your savings as collateral to secure the credit card. The credit card company may place a lien against your savings to prevent you from spending the money. That way, if you default on the card, they take your savings. Oh, and your credit gets ruined.

5. If you didn't have a credit report before this, as soon as you open one of the credit card deals in your mailbox and apply for it, you will have one. If you get turned down, you'll have a negative report. If, however, you get accepted and you use your credit card responsibly and make your payments on time, you will be well on the way to developing a great credit history.

Once you've used your "beginner" card for a year or two, you should apply for an unsecured credit card. No cosigner, no prepaying and no lien on your savings account. You're in the big leagues, now. This is real grown-up stuff.

If you have been using your credit card carefully, you probably have several credit card deals to choose from. Look through them carefully and decide which card is the wisest one for you to get. Maybe you want a low interest rate. Or maybe some kind of rewards program is better for you, like a frequent flyer program. Whichever credit card deal you choose, continue to use it responsibly and to manage your finances wisely.

If you qualify for an unsecured credit card, don't think that means that you can get a bunch of cards. Two to four credit cards is plenty for anybody. Any more than that and you run the risk of charging too much stuff and getting too far into debt.

This may seem like a long, drawn-out and tedious process. There's a lot at stake, though, so it's worth taking time to generate an excellent credit history. Sometime in the near future, you will want to buy a house. If your credit report is pristine, you'll be approved for your home purchase and you'll get an excellent interest rate. That will make it all worthwhile.