How to rebuild bad credit

Bad credit can keep you from buying a home, financing your education, and even from getting a job. This is why it's so important to build a good credit history.
Starting with your first credit card, everything you do that involves credit becomes part of your credit history. To have a good credit history, you have to use credit responsibly. But what counts as using credit responsibly?

1. Charge only what you can afford to pay

When you get into the habit of charging only what you can afford, it lets future lenders and creditors know that you are a responsible borrower. You'll find it easier to borrow money and get new credit when you show that you know how to only borrow what you can pay back. Not only that, only charging what you can afford helps you avoid excessive debt.

2. Use only a small amount of the credit you have

Maxing out your credit cards – or even coming close – is one of the most irresponsible ways of using credit. Chances are that you can’t afford to pay off a maxed out credit card balance. Lenders know that borrowers who max out their cards often have difficulty repaying what they've borrowed. Staying below 50% of your credit limit is wise, below 30% is best.

3. Start with only one credit card

Many first-time credit card users accumulate a collection of credit cards within their first few years of using credit. Don't do this. The more credit you have, the more you'll end up using. Learn how to be responsible with credit before you apply for additional credit cards.

4. Pay your balance in full and on time

If you're only charging what you can afford to pay, this won't be a problem. Paying off your balance each month shows that you're capable of paying bills, something creditors and lenders want to see. Since a large part of your credit score includes timeliness of your payments, paying your balances on time improves your credit.

5. Carry a balance the right way

Having a credit card balance isn't bad as long as you do it the right way. Make more than the minimum payment each month to pay off your balance as quickly as possible. Avoid making late credit card payments and continue to keep your balance at a reasonable level. If you follow these principles, carrying a balance won't hurt your credit.

For more information on how to handle your budget and credit cards, or a consultation on tracking your spending visit www.anewhorizon.org or call A New Horizon, Credit Counseling Services, Inc. at 1-800-556-1548.

Source:  By LaToya Irby, About.com.  LaToya Irby is a freelance writer with a specialty in personal finance. She is passionate about helping others understand the value of good credit and debt management.