Learning Center
Basic Finance
How Credit Affects You
Preparing for Home Ownership
Steps for Buying a Home
Life as a Homeowner






 
Additional Resources
Module 2
How Credit Affects You
Basics of Credit
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Establishing Credit

Credit History is ImportantSome people may not use credit. Some people prefer to pay for things in cash. Others may just be starting out and have never borrowed money or used credit cards. If you’ve never borrowed money or used credit cards, you probably have not established a record that shows you can manage credit responsibly. So, you won’t have a credit history — and that can make it difficult for you to obtain a loan when you need it. If you do not yet have a credit history, there are several fairly easy steps you can take to demonstrate your ability to manage credit:

  • Apply for a secured credit card. A secured credit card is a type of credit card linked to your bank account, allowing a credit card company to deduct payment if you fail to make your monthly payments. To obtain this type of credit card, you generally must deposit an amount of money equal to the credit limit of the credit card into a bank account. The money you deposit, while it will earn interest, may not be used by you for any other purpose. When you receive the credit card, always make the monthly payments in full and on time to begin establishing a good credit record.

  • Establish a non-traditional credit history. Create a history of your timely rent, phone, utility, cable bill and other regular payments. Keep copies of your cancelled checks and rent statements. These documents will help show that you have a history of making regular and on-time payments.

  • Get a co-signer. Ask a friend or relative who has good credit to co-sign a loan with you. Keep in mind that with a co-signed loan, both your and the co-signer's personal credit will be checked. Your co-signer is required to sign a contract agreeing to pay the debt in full if you fail to pay the loan. A co-signed account will appear on both your credit history and that of the co-signer’s and will impact your credit and the co-signer's credit. Realize that you are asking someone for a big favor to be a co-signer, so many people will understandably say ‘no.’

A Note About Co-Signing edge

Before you decide to co-sign for a relative or friend, be sure you understand exactly what is involved in co-signing a loan or other debt. When you co-sign, you are making a legal commitment to repay the debt of the person for whom you co-signed (your friend or relative) in the event that this person defaults, refuses to pay or otherwise is unable to repay the debt. If this person fails to repay the debt, you will be responsible for repayment and if you refuse or fail to repay the debt, the creditor can sue you in court and garnish your wages, attach a lien against your home or car, and use other potential methods to collect the debt. Co-signing also impacts your credit rating. If the debt is ever in default or late payments are made, this may appear as negative information on your credit record. Therefore, before you co-sign for a friend or relative, think carefully about this decision and be sure you can afford to repay the debt if your friend or relative defaults.


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