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How to Establish a Credit History

Consumer credit provides individuals a way to purchase expensive goods and services quickly rather than saving the money for them first. In addition, consumer credit allows you to build up and maintain a good credit score. Establishing a good credit record can be difficult for many first-generation Hispanics or anyone else without a credit history. During my career in the financial services industry, I’ve helped numerous Hispanic members. Here are the steps I’ve recommended to them to build credit and maintain a good credit score.

If you plan to obtain a credit card, car loan, or mortgage, make sure you carefully read the policy regarding a product. It is very important to know the interest rate you’re getting and how much you will be paying per month. By handling those debts correctly, you should not have an issue with managing the debt.

I always tell members at my credit union that building credit is very crucial to achieving their financial goals. If they don’t have any credit history, I suggest two ways to establish one:

1.   Open a secure credit card. To do this, you open a deposit account for $500 to $1,000. The financial institution secures the credit card balance with your deposited amount and gives you a credit limit up to that amount. Keep this secured credit card for at least 12 months.

2.   Apply for a credit card or other loan with a co-signer.  A co-signer agrees to pay your debt if you are unable to do so yourself. A co-signer should only stay in the loan for 12 months as well.

Once you’ve established credit, it’s important to manage your debt. To do so:

1. Review credit card statements every month;

2. Review how much interest you are paying if there is a balance on a credit card; and

3. Use it only for emergencies or for recurring payments, such as utility bills or fixed expenses.

Ideally, you should pay off the total amount owed on your credit card statement each month. If that isn’t possible, then keep your credit card balance under 50% of the total available balance. For example, if you have a credit card with an available credit of $10,000, your total balance should be no higher than $5,000. This is because credit reporting agencies review your usage and determine your credit score. The more credit you use and don’t pay off, the lower your score will go.

Establishing credit and maintaining a good credit history doesn’t have to be difficult. It just requires a little planning and a little restraint. If you start with a small loan, use the credit carefully, and consistently pay off your debt each month, you’ll establish a strong credit record very quickly.

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