How to Establish Credit

Repairing your credit – getting rid of the negative credit report information and caught up on past due bills – will raise your credit score some. To raise your score to a level high enough to get loan approval and better interest rates, you’ll have to rebuild your credit – prove that you can handle credit responsibly. Getting started might be difficult, but once you begin to build momentum, you’ll be coasting your way to a good credit score.

Get a CD Loan

Here's how it works:

  • A simple Certificate of Deposit allows the owner to deposit a certain amount of money, (usually a minimum of $1000) as an investment for a fixed length of time, ranging from three months to five years. CDs are federally insured and pay higher rates of return than simple savings accounts.
  • The depositor can take out a loan for up to 100 percent of the CD amount, secured by the CD itself. Because the loan is secured by the cash in the account, the interest rate to the borrower is low -- typically the annual percentage rate of the CD plus some index the bank uses.
  • The loan is paid back during the term of the CD, which can be up to five years. If the customer defaults on the loan, the bank can seize the money invested in the CD. If the loan is not repaid by the time the CD expires, the depositor can renew the CD to extend and refinance the loan.
  • Rates vary, but typically, the borrower will pay a premium of several percentage rates to borrow their own money. In other words, if the CD is paying 6 percent, for example, the cost of borrowing might be 9 percent.
  • The benefits of this loan are that it typically carries a low interest rate compared to an unsecured personal loan or credit card, and it allows savings to remain in place. Most of the time the CD continues to earn interest on a monthly or yearly basis, offsetting the interest charged on the loan so that, in many cases, the borrower is paying an even lower rate of interest. Depending on the bank, it may affect the outcome of the interest rate on the loan.
  • Despite their low interest rates and generous repayment terms, consumer finance counselors advise borrowers to ask if the bank reports loan payments to any of the three credit agencies. If the bank reports loan activity, it can work in the borrower's favor if payments are made on time. Likewise, if the borrower defaults on the loan, that activity is also reported. Otherwise, it's a waste of time for borrowers looking to establish a credit history if the bank doesn't report any payment activity.
  • Marshall & Islley Bank (M&I Bank) offers this type of program called the Credit Builder program as part of their Foundation Suite.

Get a Secured Credit Card

The main purpose of a secured card is to help build credit. Secured credit cards are a good choice for consumers who feel they will be turned down for a regular credit card. Ask your local bank if they offer secured cards. Many national banks are starting to offer this service. You will rarely be turned down for this card because you will be opening a savings account to secure the credit line on the card. In most cases, the banks require that if you have a bankruptcy, that it has been discharged. By putting $500.00 into a savings account, you will be allowed to charge up to $500.00 on the card. Although secured cards tend to have higher interest rates and annual fees, they provide a valuable steppingstone. Many people find they can graduate to an unsecured credit card within a year or 18 months.

Orchard Bank, a division of HSBC, offers secured credit cards with a deposit as little as $200. 1-877-700-4722. Or try:

http://www.orchardbank.com/ecare/homepage/creditcards.

Keep the Accounts Active

Once you've successfully received new lines of credit, it is important to have some activity going on each month. We don't suggest you pile up large debt-- maybe $50 dollars or so in a balance. If possible, pay the balance off when the bill arrives. And pay it on time. This is what future loan officers and other creditors want to see.

You need to display at least one year of positive credit history to be taken seriously, especially by a mortgage company.

Disclaimer: The information provided in this site is not legal advice. All information is general information, some of which pertains to legal issues involved in the subject matter. Credit Matters Inc. is not a law firm and is not a substitute for an attorney or law firm. Your access to and use of this site is subject to additional terms and conditions.