To take out a loan out for - a house, a car, or even a refrigerator - you must have a good credit history. This tells a prospective lender that you are a responsible borrower, and he or she can confidently approve you for a loan.

Perhaps you don't have a credit history: you are young and haven't had time to build credit; you've always paid in cash; or any number of other legitimate reasons. Even so, you have several options to start establishing a credit history.

1. Open a checking or savings account; the record of deposits, withdrawals, and transfers will establish how responsibly you handle money.
2. Get a card at a local department store and build your credit history through timely payments - in full, whenever possible.
3. Apply for a loan: this option will cost because interest payments accompany all loans.

Once you start establishing credit, it's only a matter of time and consistent payments before you have a very nice credit history built up.

If you decide to open a credit card account, the best advice is to shop around. The Consumer Credit Protection Act, passed by Congress in 1968, protects consumers from unfair lending practices. And the Truth in Lending law requires every lender to state its charges in a clear and uniform manner, for easy price comparison. Be sure your potential credit company measures up.

The forms by which credit must be expressed are:

1. Finance charges: The total dollar amount the credit will cost you, including interest plus any service or carrying charges.
2. Annual percentage rates (APR): The cost of your credit as a yearly rate.

Compare the rates of any cards under consideration, and figure out which best matches your credit needs. Another factor to consider is the payment method of the card. Generally, there are three kinds:

1. Revolving Agreements: Allow you to pay in full every month or make a partial payment on the outstanding balance. Cards with this payment option are usually banks, department stores, and gas companies.
2. Charge Agreements: You promise to pay the full balance every month to avoid any interest charges. Charge cards (different from credit cards) and charge accounts with local businesses use this method.
3. Installment Agreements: You sign a contract to pay a fixed amount of equal payments over a set period of time. Automobiles, furniture, and major appliances are usually paid for this way.

Once you've researched and decided which card best serves your needs, the next step is to apply for it. Be aware that the Equal Credit Opportunity Act, or ECOA, ensures that unfair factors are not used to accept or deny your application. A lender may not consider the following factors when determining your credit-worthiness:

• Race
• Color
• Religion
• National origin
• Sex
• Marital status
• Age (provided the applicant has capacity to contract)
• Receipt of income from public assistance sources
• Childbearing plans (for women)
• Good faith exercise of any rights under the Consumer Credit Protection Act

Appropriate factors when considering your application are:

• Employment information: occupation; how long you've worked; how much you earn
• Other expenses: number of dependents; whether you pay child support or alimony and the amount of these expenses
• Credit histories and records: how much you owe; how often you borrow; whether you pay your bills on time; whether you live within your means
• Signs of stability: how long you've lived at your present address; whether you rent or own your home; the length of your present employment
• Any collateral you possess: may include savings, investments, or property

Acceptable reasons to turn down credit include:

• Too little time in your current job or at your current residence
• Too much outstanding debt
• Unreasonable purpose for requesting credit
• Cosigner can't take on additional debt liability
• Errors on applicant's credit record
• Strictness of creditor's standards

Once you obtain credit, it is important to protect it.

• Be extremely selective when giving out your account number, and even more selective when giving out your PIN (Personal Identification Number) - even to family members or close friends.
• Carry only the cards you use; keep the others in a safe place.
• Keep a list of accounts and the telephone numbers of the issuing companies. If the cards are lost or stolen, you can quickly contact the companies.
• Save sales receipts and compare them with your bill. When you throw them away, be sure the account number can't be read (shred or tear them up).

Now that you have established credit, you may want to take the next step toward home-ownership and apply for a mortgage loan. To determine your credit-worthiness, a lender will want to establish three things:

1. Your capacity to meet your financial obligations. Do you have a steady income? How much do you already owe?
2. Your capital, including savings and other assets that can be used for collateral for loans.
3. Your character, demonstrated by how reliably you pay your existing bills (rent, telephone, electric).

The means by which the lender obtains your credit information is via your credit report. There are three major credit-reporting agencies that can provide prospective lenders with your report:

• Experian
• Equifax
• Trans Union

These credit reports contain:

• Identifying information about you - name, address, phone number, Social Security number, and so on
• Credit information - details about your credit cards and loans, including payment histories
• Public record information - bankruptcy records, foreclosures, monetary court judgments, and so on
• Inquiries - names of those who have obtained copies of your credit report, etc.