For most people, making a major purchase like a car or home requires getting a loan. Not to mention that many employers now check credit histories when evaluating job candidates.
Getting a loan requires having a good credit history, so that lenders can see you are not too much of a risk. This is especially true now that the lending bubble has burst and lenders are forced to go back to sensible lending practices. Many people may either have no credit, or may have tarnished credit and are not currently able to get a loan. There are ways to fix this though.
The first way is to get a co-signer for the loan. This lets someone with no or poor credit get the loan, however, the co-signer is legally responsible for the loan if the borrower doesn't pay, whether they ever use the collateral or not. Co-signing loans is more risky for the co-signer than anyone else, especially if they have a good credit score they wish to protect. Many relationships have been ruined with the co-sign method.
For those who don't want to ask their family or friends to co-sign, there are other ways to build up that credit score. None of them are instant like the co-sign, but they can help you to build your credit on your own without potentially ruining your relationships.
One method to establish or repair credit is to set up a savings account, and then getting a secured loan that is secured against the balance of the savings account. Generally the minimum for this type of loan will be around $2,000, but if you have a history with the bank, talking to a manager might get them to lower the minimum. Because the loan is secured against the balance of the savings account, the bank risks nothing, and also collects interest on the monthly payments. Note that you will not be able to withdraw your savings while you have a balance on your loan. Obviously it will take time to save up the $2,000 but it will be worth it if you finally have established your credit.There may be a temptation to pay the loan off right away, but that won't help your credit score, which is the whole point of doing it. Take at least a year to pay off the loan, and make sure every payment is on time or early. You'll pay a loan creation fee and interest every month, but it will be worth it when you have good credit. Installment loans also tend to carry more weight than revolving debts on credit reports.
Another method in the theme of using secured debt is the secured credit card. A secured credit card is one which you pay money up front that you wish to eventually spend via the card, and your available balance is updated with the monies you have sent in. The card issuer risks nothing since your payments are made before you are able to use the card. These cards are very easy to get and are great for starting or repairing a credit history. Again, you want to make sure you make all of your payments on time or early. There is usually a start-up fee for these cards, and some carry annual fees as well. Again, these fees are worth it if it helps you to get lower interest rates when you make a major purchase like a house.
Other tips for keeping your credit score high are to monitor your debt to income ratios, and also your total outstanding debt to credit limit on your revolving debts (credit cards). Keep these low to show that you can handle debt responsibly. Lastly, pay all your monthly bills on time every month. Its a great habit to have. Remember, its all about showing the lender that you are not a credit risk.
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