How do I start establishing good credit?

In the past, credit card companies were all over college campuses handing out pre-approved credit cards to young adults regardless of whether they had a job or money in the bank. If you're under 21, the Credit CARD Act of 2009 prevents credit card companies from giving you a card unless you show proof of income or you have a co-signer who is willing to pay the bill if the main cardholder can't.

Savvy young people want to avoid the trap of too much credit and some would prefer not to have a credit card at all. But even FICO's website recommends obtaining a credit card in order to start building good credit. Lenders not only review your credit score, but they also look for a pattern of responsible spending and saving. If you show that you can handle credit wisely, you appear to be a lower risk to them.

What helps establish good credit?

The quality of your credit is measured by your credit score. Your credit score depends on several factors, including your payment history, the length of your credit history and your balances in relation to your credit limits. Lenders want to see some type of credit in place for 12 to 24 months to prove your ability to handle credit.

Always pay your bills on time. Even if you don't have a credit card yet, you should make sure to pay your rent, utilities and cell phone bills on time. These payment histories can be used as alternative sources of credit information even though they don't show up on your credit report. If you have a student loan, this will show up on your credit report, so making those payments on time can help establish good credit.

Getting started with a credit card

One option for young people is to ask their parents to co-sign for a credit card, which can work well as long as both the parents and young adults are responsible enough to handle the credit.

If you can't get a co-signer, you can apply for a credit card once you have an income. If you are newly employed, you may need to start with a secured credit card. A secured card requires you to deposit money into an account that will be used as protection for the bank. You pay the bill as you would any other credit card while the cash stays in the bank. Be sure to check the fees and the interest rates on a secured or unsecured credit card so you get the best deal you can find.

Once you have a credit card, the best way to avoid getting into debt is to pay the balance in full each month. Even if you charge as little as $20 per month, as long as you pay it back faithfully, you are on your way to establishing good credit.

Do you have other ideas about how to establish credit?

This Guide to Money answer includes the topics: Protect, Credit score.

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include The Washington Times, Urban Land Magazine, NAREIT's Real Estate Portfolio, and numerous Realtor association publications. Michele's first book, "HOMEBUYING: Tough Times, First Time, Any Time" is available now at Amazon.com or from www.MicheleLerner.com.

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