Establishing Credit

start building your credit

If you are new to credit such as a graduating student, divorced spouse, or other, this guide is an important first step to building up a good credit history.

It's quite simple! You fulfill the obligations on every decision that you make ... plus some other things of course. Review our guide on the character building steps for good credit.

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How to Establish Good Credit

If you are new to the credit game ...

... such as a recent HS graduate or divorcée, it is important that you establish good credit habits at the beginning of your credit-use life.

Good credit habits will help when you need to buy a home, apply for a key career position, start your own business, and manage your finances.


There are three criteria that establishes good credit

  • Character:
    the measurement of your "willingness" to repay the debt (measured by your past credit experiences, length of employment, length of residence, etc.)
  • Capacity:
    the measurement of your "ability" to repay the debt (measured by your employment, income, current outstanding debts, monthly expenses, etc.).

    see example calculation of capacity ratio
  • Collateral:
    the measurement of available "resources" that the lender can assume in the event that you fail to repay the debt (savings, property or investment).

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Credit Building Plan (Step 1)

You can demonstrate your willingness to repay your debts

by charging expenditures on your credit card and paying the full amount each month


Apply for a pre-paid card with optional credit reporting features.

You do not need to have a credit history to be approved for a card. Discover and other card companies offer credit cards to new credit applicants on a limited basis:

view and compare no-credit credit cards

Many of these no-credit cards are either secured or pre-paid cards - meaning that you have to have funds set aside to secure the card. If you are a student with good grades, check the Discover card. They offer credit to students.

discover card

Another option is to apply for a 1-2 gas cards from a major oil company. Many of these companies will extend limited credit for new-to-credit applicants:

Oil companies:


Make all of your purchases (or gas) with your pre-paid or gas card.

Since the secured or pre-paid card is pre-loaded, your purchases are limited by the amount of cash you load to the card. This prevents you from falling into credit card debt.


Continue this cycle

every month for all of your gas card obligations.

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Credit Building Plan (Step 2)

Not only do credit agencies report credit delinquencies,

They also report any late or non-payments for rent, utilities, taxes, divorce support payments, or other obligations or contracts that you have entered into.

As you move through life, make sure that you make timely payments for all rents, utilities, taxes and other obligations

Maintain a spending budget in line with your income.
See our discussion on financial/budget management.

Include in your monthly budget a savings deposit of $50-75 per month. These savings will be used in Step 3.

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Credit Building Plan (Step 3)

Continue Steps 1-3 for 6-12 months.

Make sure that you pay your credit and other obligations on time and for the required amount.


If you can set aside at least $300-500 in your savings account,

you might apply for a secured credit card from a lending institution and use it as a 2nd card along side your other credit or pre-paid cards.

The secured credit card is exactly like any other VISA or MasterCard. The card was designed for applicants who are trying to establish credit or repair bad credit.


Here is how secured credit cards work:

  • you will make an application for a secured credit card:
    link here for list of top secured cards
  • you will make a deposit into a savings account maintain by the card issuer
  • the issuer will then issue a credit card in your name with a credit limit equal to the amount of your deposit or greater
  • you will not be able to touch your savings deposit while you have your credit card — your savings will earn interest while it sits into the account
  • you can now make payments with your credit card.


Pay your budgeted living expenses, including your gasoline, groceries, utilities, etc., with your secured credit card.

With each purchase, deduct the amount from your money account either by making a notation in your checkbook or laying cash aside.


Sample of credit card purchase accounting

Let's begin with budgeted $200 deposit into your bank account for living expenses.

Bank Account Credit Card $Amt Card Savings Acct

You use your secured credit card to purchase gasoline for $20. You will make the notation as follows:

Bank Account Credit Card $Amt Card Savings Acct
$180 Gasoline $20 $20

You will subtract $20 from your bank account and transfer the amount over to your card savings account. You will continue this accounting for every credit card purchase:

Bank Account Credit Card $Amt Card Savings Acct
$180 Gasoline $20 $20
$145 Gasoline $35 $55
$133 Video $12 $67
$88 Home Supplies $45 $112

Your accounting will show that you have a Bank Account balance of $88 — this is your remaining living budget. It also shows that you have credit card charges of $112 and allocated savings for the same amount.

Although your actual Bank Account balance is still $200, the $112 allocated savings is an accounting deduction that will be made available when your credit card charges come due.

Bank Account Credit Card $Amt Card Savings Acct
$180 Gasoline $20 $20
$145 Gasoline $35 $55
$133 Video $12 $67
$88 Home Supplies $45 $112
$88   $112 $112

Next, the card credit card statement comes in for $112. You use the Card Savings account to pay off your bill in full.

You can use a ledger book or Personal Financial Management software to manage your accounting.

We invite you to review our guide for credit card budgeting and accounting.


The card issuer will bill you monthly listing your purchases and amount.

Make sure you pay the amount in full 2-3 days prior to the actual due date (to ensure payment is received and processed).

You may make payment either by paper check, using your bank's online bill payment feature, or connecting to the card issuer's web site for account access and payment.

Continue this monthly cycle for the next 6-12 months.

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Credit Building Plan (Step 4)

Continue Step 4 for 12-18 months,

making sure that you pay your credit and other obligations on time and for the required amount.

After about a year, your credit report will show a history of on-time payments. You will likely begin receiving credit card offers that offer incentives such as rebate and low-interest rate programs.

You may now replace your secured credit card with a card that offers the most attractive terms:

view card listing to compare programs

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