Credit Management

Establishing a Credit History in the USA

Establishing a good credit history is often frustrating for those who are new to the United States and don’t understand how the system works. Establishing a credit history is a critical component for financial survival. For instance, if you do not have a credit history you will not be able to have your electric or telephone turned on in your home in many states unless you pay a hefty deposit.

If you are not careful, you may fall for credit scams that can cost you a lot of money. This article series is designed to help you understand how credit works, how to get new credit, and avoid expensive debt traps.

How does credit work?

Establishing a credit history has several advantages. Your new credit card will allow you to:

• Buy now, and pay for the item later
• Make large purchases and pay for them over time
• Build a good credit score if you pay your bills on time

What types of credit can you apply for?

Installment loans let you borrow a fixed amount and pay it back in fixed monthly payments. A good example is a car loan, where you will borrow enough to buy the car and then pay it back over two to five years.

Revolving accounts or "lines of credit" give you a certain amount you can borrow against (your "credit limit"). You can usually then pay the balance off in full or make smaller minimum payments. A good example of a revolving account is a credit card.

Warning! Don’t make the mistake of allowing credit card debt to pile up, because you’re only making the minimum payments. The minimum required payments on most credit cards is so small that even a balance of $500 -- $1000 can take years to pay off if you only make the minimum payment each month. Some loans are secured which means you pledge collateral the lender can "repossess," or take back, if you don’t pay the loan as agreed. Most car loans and home loans are secured loans.

Other loans, especially credit cards, are unsecured, which means there is no collateral for the loan. Unsecured loans can be harder to get because there is nothing to back up the loan, other than your promise to pay. While they can’t take your car or home if you don’t pay, they can ruin your credit history if you don’t handle your new credit cards with care.