Credit Crunch: Establishing Good Credit

What is the best policy to handle all your personal and household finances? Operate on a strictly cash basis! That's a surefire way to avoid sinking into credit-card debt, which so many Americans unintentionally do, often with disastrous consequences. However, a credit card can be extremely handy for renting cars, buying airline tickets, booking hotel rooms, traveling abroad and, of course, for emergencies.

Another compelling reason in favor of having a credit card, one that takes the long view, is that a card provides a suitable manner for lenders to understand how responsible you are with your finances. It's next to impossible to obtain a mortgage, or an automotive or small business loan unless you have a considerable and fairly spotless credit history.

One of the favorite ways for people to get their first card is with a "secured card." These are MasterCard and Visa cards that look just like normal credit cards, but they are issued with one very important difference: a secured card has a credit limit which is actually the amount of money you have on deposit at that time with the bank that issued the secured card.

This is not a credit card as no one is issuing you credit. You have money set aside in a particular account and whenever you buy something on that MasterCard or Visa, that amount gets debited. It's kind of like a debit card but with a huge difference: It has the MasterCard or Visa symbol on it so you can use it anywhere you can use a conventional credit card!

Make sure you deal with a trustworthy card issuer as there are a lot of phonies in the secured-card world who will take your money and give you a worthless chunk of plastic in return. Don't respond to TV ads, 900-number telephone solicitations, supermarket tabloids or other come-ons. Be smart about this!

Part of your reason for getting a secured card is to establish credit and show a pattern of on-time payments, so make absolutely certain that the bank you select reports your record to one of the three major credit bureaus, and that it does not flag you as the holder of a secured card (secured cards are also popular with consumers with poor credit histories).

When shopping around, look for a card with a conversion option. This makes it possible to convert to an unsecured card after a given time period, provided you've been financially responsible. Ask, too, when you can get back your collateral. Many banks will return your security or let you convert to a standard card within 12 to 24 months. You'll also want to know what the interest rate is on outstanding balances, as typically, the more you deposit, the lower the rate.

Two other ways to create a credit history so you will at some point in the future qualify for a conventional credit card: (1) Get a petroleum company card and charge all your gasoline on it or (2) get a department store credit card with a big retailer like JC Penney or Sears. Ensure that the retailer reports your payments to at least one of the three major credit bureaus.

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