Steps to Build Credit

Building credit is a gradual process that requires understanding how credit works and making wise financial decisions. Wrong choices and bad habits lead to a poor credit rating, which can reduce your chances of getting a home or car loan when you need one and make it harder to get a good interest rate.

Personal Loans

Start establishing a credit history by taking out a personal loan using your property as collateral. Visit your bank and talk to a loan officer about applying for a small personal loan using jewelry or other personal property as collateral. Rather than spend the money, deposit this cash into a savings account and then make monthly payments -- on time each month. This will start your credit report off on a positive note and help you establish a good payment history with your bank, which will open the door to other credit opportunities.

Retail Credit Cards

First-time credit applicants may not qualify for major bank cards. They use credit scores to determine eligibility; without a credit score, they can't assess your level of responsibility. Apply instead for a department store credit card. You can submit an application in the store, and these are easier to secure than major credit cards.

Sharing an Account

Piggybacking is the term used to describe adding another person to a credit account. Parents often help their children establish credit by adding them as an authorized user to their credit card. Talk to your parents to see if this is an option. Your spouse or a sibling would be another option.

Credit Patterns

Getting a credit card and applying for loans puts you on the right path. But to achieve a high credit rating, you've got to practice good habits. This includes making bill payments by their due dates to avoid late fees and negative remarks on your credit file. Most creditors and lenders have websites that allow you to manage your accounts online. Paying online and setting up automated monthly payments can help alleviate late payments. It's wise to pay off new credit card charges each month to keep your debt-to-income ratio low. If you can't pay them off each month, stay below 30 percent of your credit limit because the amount of credit used -- not just the number of cards -- affects your credit rating.

Credit Reports

Creditors report your payment history to the credit bureaus. Once you've established credit, you should check your credit report to ensure accuracy. Annual Credit Report (see Resources section) gives consumers one free report a year from each of the bureaus. Monitor your report regularly to catch mistakes early and recognize signs of identity theft. According to CBS News, about 80 percent of credit reports have errors. Some mistakes are minor and may not affect credit scores. But if your report contains mistakes such as unknown collection accounts, liens or judgments, these remarks can reduce your score.