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Tips on How to Build Your Credit History

Apply for a small bank loan.

Apply for a small loan at the bank, thrift, or credit union where you have checking and savings accounts.

Charge merchandise at a local store.

Although stores typically have a lower credit limit and a higher annual percentage rate (APR), they are generally more willing to lend you money.

Make large down payments and negotiate credit payments.

Apply for a credit card or installment loan based on a substantial down payment for the merchandise. By giving a large down payment you lessen the risk for the creditor, or store, and demonstrate that you are willing to put some of your assets into the purchase. For example, if you are buying a used car for $5,000.00 and have enough cash, you might consider making a down payment of $1,000.00 to $3,000.00. Although the loan will be very small, it can prove you make your payments on time.

Ask a friend or relative to cosign a loan for you.

A cosigner promises to repay the loan if you do not. The lender should report the payment information for both you and the cosigner to the credit reporting agencies. Remember that you can damage your cosigner’s credit history if you do not pay the loan back as promised.

Pay your bills on time.

This will help establish a good payment history so you can get credit in the future. In addition, ask the lender to review your history of making rent and utility payments to demonstrate your ability to pay.

Keep your debt levels low.

The more debt you have in relation to your income or your available credit lines, the more you will be viewed by lenders as a higher risk borrower. All of your monthly obligations (rent/mortgage, car payments, school loans, credit card payments, etc.) should be less than or equal to 33% to 36% of your monthly gross income.

Make regular deposits into a savings account.

This is another way to show the lender that you can make payments every month, even if you are making the payments to yourself.

For example, if you have established a savings account with a $500.00 balance, you can apply to the bank for an installment loan secured by your savings account as collateral. The bank will approve this for you because you are already a customer and this loan will be fully secured. Once you have made all payments promptly as agreed, your credit report will reflect your excellent payment record for this loan.


Repairing Your Credit History

Tips on How to Improve Your Credit Record

To repair your own credit:

  1. Begin by contacting AnnualCreditReport.com (877-322-8228) to get a copy of your credit report.
  2. Report errors on your credit report to the credit reporting agency in writing. Include copies (not originals) of documents that support your position. Keep copies of your dispute letter and enclosures. Also, tell the creditor or other information provider, in writing, that you dispute an item.
  3. Contact your lenders directly to discuss your financial situation and negotiate payment plans.
  4. Opt out of receiving unsolicited offers for credit cards to avoid the temptation of applying for more credit.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Counselors discuss your entire financial situation with you and help you develop a personalized plan to solve your money problems.

If you decide to use a credit counseling agency, the Federal Trade Commission offers these tips for choosing a reputable credit counseling agency:

  1. Interview several credit counseling agencies before signing a contract.
  2. Check with your state attorney general, local consumer protection agency, and the Better Business Bureau to find out if consumers have filed complaints about the agency you are considering. A reputable agency will send you free information about itself and the service it provides without requiring you to provide any details about your situation. If the agency will not do this, find another agency.
  3. Ask questions about services, fees, and a repayment plan.

Questions to Ask Credit Counseling Agencies

Services and Fees:

  • What services do you offer?
  • Do you have educational materials? If so, will you send them to me? Are they free? Can I access them online?
  • Will you help me develop a plan for avoiding problems in the future?
  • What are your fees? Do I have to pay anything before you can help me? Are there monthly fees? What is the basis for the fees?
  • If I sign a contract, how long is it for and can I get out of it?
  • On average, how long does this process usually take?
  • Who regulates or licenses your agency? Are you licensed to offer your services in my state?
  • Will I work with one counselor or several?
  • How are your counselors trained?
  • What assurance do I have that information about me (including my address and phone number) will be kept confidential?
  • Will the fact that I am working with you appear on my credit report?

Debt Management Plans:

  • If I enroll in a repayment plan, will it appear on my credit report?
  • How do you determine the amount of my payment?
  • How does your debt management plan work? How will I know my creditors have received payments?
  • How often will I get status reports on my accounts? Can I get access to my accounts online or by phone?
  • Can you get my creditors to lower or eliminate interest and finance charges or waive late fees?
  • Is a debt repayment plan my only option?
  • What if I cannot maintain the agreed-upon plan?
  • Will this plan cover all my debts?
  • How secure is the information I provide to you?

For additional information on choosing a credit counselor, visit www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm.


Credit Repair Scams

A reputable credit counseling company can help you work through your debt and payment problems, but be careful if they make a lot of promises they may not be able to keep, or ask for a large payment up front.

Beware of companies that:

  • Promise to erase your bad credit or to remove bankruptcies and judgements from your credit file. No one can have accurate information removed.
  • Promise fast and easy credit repair. If you have bad credit, it can take years to repair your credit legitimately.
  • Offer to create a new identity for you. If you make false statements on loan applications or use a fake SSN, you will be committing fraud. You can also be charged with mail or wire fraud if you use the mail or telephone to apply for credit and approve false information.
  • Want you to pay for credit repair services before providing you any service. Legitimate companies provide a service before requesting payment.

Maintaining Your Credit History

Once you have built a good credit history, you need to maintain it. It is very easy to ruin your credit history, and it can take many years to repair it again. In closing, here are some final tips for maintaining your credit when payments are a problem.

  • Look for ways to cut expenses.
    If possible, pay your bills using funds in your checking or savings accounts and avoid withdrawing or borrowing money from your retirement savings.
  • Going forward, stay current on loans, credit cards, and other bill payments to minimize damage to your credit score.
    This is important if your financial difficulties are due to a job loss because as you apply for new jobs, employers may review your credit report.
  • Contact your lenders immediately.
    If you expect you will be unable to pay your bills—whether they are utilities, rent, or credit card—contact your creditors immediately to work out a payment plan. You can damage your credit rating if you wait until you are unable to make the payments, and may have fewer options available for getting help.
  • Be proactive.
    Be proactive if your payment problems have already started. That means you should seek help quickly by discussing your options with your lender or creditor, or contacting a reputable credit counselor.