How to establish a good credit history

You may remember your first credit card as a badge of adulthood. You may get mail from banks almost weekly offering pre-approved credit cards and competitive rates. If you don't have a bad credit history, banks should be more than willing to extend you some credit. Getting a credit card is one thing. Using it effectively to establish a good credit history is another story altogether.

Securing credit is like applying for a loan: you ask a financial institution to lend or "rent" you the use of its money. For the use of the money, you can expect to pay "extra" money. The terms of your agreement specify the rate of interest - the extra money you pay in order to pay back your debt to the institution that issued the credit card. The benefits of establishing a good credit history are significant. They include the following:

1. The ability to make major purchases when you don't have immediate cash for the items.
2. A sense of security that you can handle an unexpected emergency by using credit.
3. The convenience of shopping without carrying a lot to cash.
4. Monthly itemized credit statements that enable you to track your purchases
5. Worldwide acceptance

Establishing credit is a double-edged sword. With its benefits come some major disadvantages, including the following:

1. Easily available credit can make spending second nature.
2. If you can't pay off your credit balances on time, you affect your credit rating.
3. You can fall into the trap of paying off some of the credit debt instead of paying the whole amount.
4. When you add credit expenses to the stated price, you end up paying more than you expected.

Establishing credit for the first time

When you're fresh out of college, starting over after a divorce, or emerging from bad debt or bankruptcy, your thoughts turn to establishing or re-establishing credit. Here are some tips for establishing credit and getting off to a good start in managing credit debt:

1. Open a checking account and a savings account at a local bank or credit union. Keep your balance at the acceptable minimum level, and never overdraw your account.
2. Make an appointment with your banker to apply for a bank credit card. Come prepared with a statement of your personal assets and liabilities and your monthly budget.
3. Applying for a charge account at a local store. Shop at this store and charge your items. Pay your bills promptly - these cards usually have obscenely high interest rates.
4. Ask a parent or mentor to co-sign for a credit card issued in your name. With this arrangement, you have personal responsibility for payments, and your credit history will be reported in your name. The co-signer agrees to take on the liability for credit payments on an account if you can't pay.
5. Keep trying. You may be rejected for one credit card and then be granted another, especially after you establish your creditworthiness by opening bank accounts and successfully using bank cards and store charge cards.