Essential First Steps to Building Good Credit
Establishing credit is a rite of passage to the world of the adult consumer. It’s something that is almost essential for survival in the modern world, but it’s also something that can seem both exclusive and elusive. In short, you’re told you can’t get credit if you don’t have it. So what’s your course of action?
Finding Credit You Didn’t Know You Had—Make absolutely sure that you don’t already have credit. Do this by getting a free copy of your credit report at annualcreditreport.com. There’s the possibility that you may have overlooked a gym membership or even a student loan. Or you may have had a service agreement with a cell phone provider or other utilities in your name. Those things count and may be just what you need to get started.
Authorized User—A good first step in the credit building process is to ask your parents to put you on one of their credit cards as an authorized user. You’ll have a card in their name, have full charging privileges, and usually the account shows up on their credit reports. If the account is in good standing, it will help you to establish a good credit score as an authorized user.
Secured Credit Card—You may not have a credit history, but probably do have a checking account. A balance of $250-$350 will usually get you approved for a secured credit card. This is a real credit card issued by a bank with a Visa or MasterCard logo. It has the advantages of any other card but the credit limit is determined by the amount of money you deposit with the bank. The main purpose of the card is to get a good account on your credit reports and improve your score to the point where you’re offered unsecured cards with much higher credit limits.
Savings Account—Open a savings account and make regular deposits. If you keep growing your savings, you can eventually secure a loan against the cash in your account since it serves as collateral. You can then pay down the loan so that you have a small monthly payment. If you make these payments without fail, your credit report will automatically start improving. (Always make sure there is no prepayment penalty on any loan or card that you activate.).
Store Credit Card—How many times have you been offered 10% off a store purchase if you open up a credit card? It can be a source of good credit on your credit report as long as they report to the credit bureaus (otherwise forget it). Pay store credit cards down within a few weeks—but not all the way. Having a small balance keeps the account active while you continue to build good credit. (Make all payments on time—this alone determines 35% of your credit score.)
Pay More than the Minimum—Making the stretch to pay a little bit more (maybe just $10 more) than the minimum payment will make an extraordinary difference in debt repayment. Example: if you have $2,500 on a credit card with an interest rate of 18% and if you only pay the minimum amount, you’re looking at 15 years of debt repayment and $2298.98 in interest charges. But if you were to add $10 to the minimum payment each month, your debt would be paid off in only 40 months and you would only pay $822.28 in interest! Every little bit can make a difference.
Be Sensible – It’s important to establish healthy credit over time because it can be a useful tool; it increases your purchase power, provides protections on purchases, and offers some benefits. It’s helpful when applying for a loan or submitting a rental application, and can be essential in the case of an emergency. But don’t accept every credit card offer that is sent to you in the mail. The disadvantage of credit cards is that it can feel like “free money” and sometimes, people get themselves into trouble. Beware of creating too much debt and avoid charging things that you do not need or are out of your budget.
Building credit is a step-by-step process that takes patience and planning. Understand that you’re just one of millions facing a commonplace challenge. Also, take advantage of good advice. At your local credit union you will find managers and advisors that will help you get your feet on the ground and give you a head start on your financial future.