Practical tips for building good credit
In today’s world, having an excellent credit history is more important than ever before. Having good credit means that you could qualify for loans, such as mortgages, car loans, student loans, and more. In addition, having good credit means that you could get lower interest rates on those loans, saving you potentially tens of thousands of dollars over the life of your loans.
While members of our parents’ and grandparents’ generations could get by just fine without a credit card, members of the younger generation are not so lucky. Simple tasks like renting a car, booking a hotel room or buying an airline ticket can be all but impossible without a credit card in hand. Young people need to understand how to use credit wisely. A credit history and a good credit score are essential parts of anyone’s financial life. This simple three digit number will have an impact on everything from the rate paid on a mortgage to the cost of car insurance.
Your credit history will affect your life in more ways than simply qualifying for loans and getting the best interest rates. For example, did you know that your credit history will affect how much you pay for insurance? Did you know that future employers could look at your credit history in order to determine whether or not you are a responsible person? Because your credit history plays such a vital role in future financial matters, it’s essential that you establish a good credit history.
Unfortunately, it can be difficult for young people to develop the credit they will need to get them off to a good start. Many are unsure how to go about building up a good credit score, and there are few high school and college courses devoted to financial matters. All too many of us end up learning about credit the hard way, by climbing out of a pit of debt and attempting to repair a damaged credit history.
The good news is that there are a number of ways for to begin building the good credit you will need.
First, do you have a bank account? If not, get one. While checking accounts do not go on your credit history, they are important financial tools that will assist you in establishing good financial habits. Being an established customer can count in one’s favor when it comes time to take out a loan from that bank or credit union, especially if the account history is free of overdrafts and other problems.
Apply for a low interest credit card with a low credit line. Low credit lines ensure that you won’t accidentally get too far into debt. Use the credit card responsibly and don’t overextend yourself. This is absolutely essential. Only use the credit card for purchases that you can pay off in full when the bill arrives. Not only will you build a good credit history by paying your bills off, you will build good financial habits.
When it arrives, pay your bill in full and on time. Late payments count against you. If you’re a little short and can’t pay the balance in full, pay as much as you can. Never simply pay the minimum balance or it will take forever to reduce your debt.
Another way to establish credit is to use store credit and pay off a loan. For example, if your car needs a new car stereo, consider using the store credit for the purchase. Try for a fairly short term loan that you can afford and ask your parents or another trustworthy adult with established credit to cosign if needed. This won’t be a huge debt burden for you. Once you’ve been approved and the deal goes through, make sure to pay your bills on time. This loan will show up on your credit report along with your payment history. In addition, when you pay off the loan, your credit history will show that you have successfully managed the financial responsibility of a loan.
If an established banking relationship is not enough to convince a local loan officer, find a cosigner. A parent or guardian is often called upon to act as a cosigner for a first loan, but it is important for both parties to clearly agree on what their responsibilities will be. When using a loan to establish credit it is a good idea to use as small a loan as is practical. This will allow the borrower to demonstrate a history of on time payments, while at the same time minimizing the amount of interest paid. This can be an especially important consideration, since the interest rate charged to those without an established credit history can often be quite high.
The key to building a good credit history is to show financial good faith. Do you pay your bills promptly? Are you always on time paying them? Use financial tools such as online banking and online bill paying to set up regular automatic payments as well as keep track of all of your accounts. For example, if you owe $25 per month on that car stereo for the next ten months, use the automatic bill paying program to set up recurring $25 payments to the lender until the loan is paid off. By pre-arranging the bill payments, you can be sure that you won’t be past due or miss a payment.
Taking these simple actions, and managing them responsibly, helps tremendously later in life by building a credit history and a good credit score.