As you build credit, you are building credibility. From a lender's perspective, credibility means “credit-ability.” In other words, the lender is asking: “If I loan this person money, will I get it back the way I want to get it back?” Note that you are not trying to deceive anybody here. You know you can handle the responsibility, so let the rest of the world know. As you go through this process, think of your credit as a brutally honest friend who always tells the truth about you. If you have been doing well, you will know. If you made a few mistakes, you can be certain that you will hear about them.

Starting from Scratch

If you do not have the bare-bones foundation in place, you will have a hard time getting anywhere. Do you have a checking and a savings account? If not, it is time to get with the program. Many lenders do not accept cash anyway, so open a free checking account at the very least.

Having money saved up is a major credibility builder, especially if you want to borrow from the institution that has your savings. Make regular monthly deposits, similar to a monthly debt payment, and you look even better. Another advantage of having a stash of cash is that you can use it for a down payment on an installment loan. Why does that help? It lowers the total amount of money they lend you, and it also lowers your required monthly payment. These factors increase the likelihood that you will be able to pay off the debt.

As always, you need to think like a lender. Consider all of the different ways you can convince them that you are likely to pay on your debts as agreed. If you have a stable employment and residence history, that might help. Before you move or change jobs, see if you can take on a little bit more credit. If you move first and then apply, you might scare them off.

Base Hits, Build on Successes

The goal of building credit is to have small successes, and build on them. You are not trying to get a zero-down mortgage as your very first loan. If you do manage to get one, it will probably cost you more in fees and interest than it should. Try to apply for credit that you feel reasonably confident you can get. Otherwise, you might end up with a higher-than-normal concentration of inquiries in your credit files. When in doubt, ask the lender for their opinion. Don't always take no for an answer though, sometimes the only way to find out is to submit an application.

When you are just starting to build or rebuild credit, everything is just a little bit more important. The things you do have a greater impact on your credit than the same actions might have for a seasoned credit user. Therefore, be especially careful at this point. If you do not feel like you should take on additional loans, you are doing the right thing by holding back.

Got Better? Get Better!

Don't forget to pat yourself on the back periodically. When your lenders first gave you a shot, they were taking a risk. Therefore, they probably did not give you the best possible deal available, and there's nothing wrong with that. It's only fair that lenders who take risks deserve to earn a little more. How do things look today? Are you less risky now, based on your more robust credit history? If so, speak up.

See if you can qualify for better loan terms after you've built a good reputation. If you have credit cards, pick up the phone and ask them for a better rate. You might be surprised at what you hear. If you got a mortgage, talk with a trusted mortgage broker to see if there is any sense in changing your mortgage terms. You might now qualify for a more attractive loan. Of course, if interest rates are not cooperating, it might not do you any good to change right away.

In general, don't forget that you are moving forward and improving your credit score. You should periodically see the benefits of all the hard work you are doing. Ask for better deals. Don't forget to shop around for auto insurance every few years. Your improved credit might help you in a variety of ways.