Building Good Credit: Start small and start early


When you’re young, it’s easy to forget about that shadowy little concept known as credit. Unpaid bills and outstanding credit card statements may seem like something to shrug off, but they can quickly creep up and put a stain on your credit that will haunt you for a long time. Good credit is essential to your personal finances—it can get you a low mortgage rate or credit card interest rate, and can help you qualify for loans. So how do you avoid a financial faux pas and build good credit?

  • Start small and start early. When you turn 18, you start out with no credit. In some cases, no credit is as bad as bad credit. Without a payment history, many lenders won’t be willing to give you the time of day. Oftentimes, lenders ask for a co-signer, but your co-signer will usually need to have a good credit record. If you want to build your credit, you may be able to get a small loan from a bank or credit union secured by a CD as collateral. Another possibility is to have your parents add you to their credit cards (make sure that this will help you and not hurt you).
  • Show a history of payments. Even if a loan is not an option, get something small like a cell phone plan. If you can establish a history of making payments consistently and on time, future lenders will be more likely to grant you credit. Other options are store-based credit cards or a special student-targeted credit card.
  • Only charge it if you can pay for it. Regardless of the type of credit card you get, try to only charge what you can feasibly pay off that month—it’s best not to carry a balance on your credit card. If you get in the habit of completely paying off your balances each month, you will not have to deal with accumulating interest and you’ll also be building your payment history.
  • Read the fine print. Always read all the accompanying literature mailed to you with a credit card, including the fine print. A lot of cards have annual fees or interest rates that shoot up after a set amount of time. Don’t get caught by surprise!
  • Trade up as your credit improves. Ditch those high-interest, high-fee cards for cards with better terms as your credit score increases. Remember to cancel any cards you don’t use anymore and shred the card itself.
  • Take advantage of your annual free credit report. You can access your free credit report at Monitoring your credit is the best way to ensure that everything is accurate. If someone has stolen your identity or a company has incorrectly reported you, there are steps you can take to rectify the situation. If you see an error on your credit report, dispute it as soon as possible. Credit bureaus are supposed to investigate appeals within 30 days, so make sure any issues are corrected before you try to make a large purchase.
  • There is such a thing as “good debt” and “bad debt.” Credit card debt is more damaging than debt from educational loans. With educational loans, lenders understand that you are borrowing out of necessity and that the money is an investment in your future that will ultimately increase your earning power, and thus your ability to repay the loan. The same is not true of credit card debt. Try to keep most of your debt on the good side.

Photo courtesy of The Consumerist

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