Building and Maintaining Good Credit
Your credit history sticks to you either like a dazzling diamond or a long shadow. Every loan and credit card you have, and how you pay it off (or don’t), is all part of this history. This information is compiled into a credit report, which is a window of your financial health. Banks, insurance companies, landlords and perhaps even a potential employer will request this copy and pass judgment based on it. Your credit rating is a make or break to purchasing that automobile, house or gaining your dream job.
But what if you have no credit history to begin with? Everybody starts with a clean slate, and when you turn eighteen, the law states you are old enough to be financially responsible to apply for credit. But how do you begin your financial life with a blank report? A great first step is a credit card.
Apply For a Credit Card to Begin Your Financial Journey
When you apply and are approved for your first credit card, your credit history is born! Time to spend, spend, spend, right? No, of course not. The worst thing to do is tell your future lenders that money flows through your hands like water. Acquiring a card is your chance to prove your sense of responsibility. The way you pay your bill every month is recorded on your report. If you skip a payment or ring up purchases you can’t pay back, you will be marked with a late payment, and your credit score will decline. This may haunt you years down the road in the form of higher interest rates for a car loan or mortgage, simply because you are seen as a higher risk. Even carrying a balance on your card affects you, though paying the minimum is certainly better than nothing.
Of course, without a credit history, it may be harder to be approved for a card. That’s why financial institutions have made it easier to begin your history, in the form of a student credit card. This card will have a lower limit and a higher interest rate than standard cards, because the issuing company has no clue about your financial track record. The lower limit is to reduce misuse, and the higher interest is to offset the loses due to the fact that a small percentage of students will never pay their bill. Another option is to have a parent or guardian co-sign the application form. They will then be responsible for the bill if the student can not pay, and they control the card’s credit limit.
A student card is a great way to begin building your credit history, and once you have a proven history of paying your bills, you can then upgrade to a standard card, with higher spending limits and lower interest. From there on, as your lifestyle changes, it will be a lot easier to apply for a car loan and a mortgage. Congratulations, you’re now a financially responsible adult. Now pay those bills!
What if I Have a Horrible Credit History? How do I Fix It?
If you dug yourself into an impossibly deep financial hole, due to bankruptcy or divorce, begin the process of digging yourself out now. A secure credit card is a great way to begin repairing your credit report. With this type of card, you have to deposit cash into your account before you are allowed to use it. That way, you have money saved to pay it off. After a few careful months of paying your bills on time, your score will be raised enough to be able to apply for a standard credit card. Keep digging yourself out by pacing your spending and paying on time, and soon there will be more positive indicators than negative.
Finally, ask for a loan when you know you’re ready, for each inquiry into your report from a potential lender will affect it. This is because inquiries indicate that you wish to carry more debt. Asking for a copy of your report does not affect it, though.
The Do’s of Repairing Your Credit
- Pay your bills on time, every month
- Be aware of your purchases, and resist impulse buys
- Don’t bring your credit card if you don’t think you’ll need it
- Never spend over your limit – sometimes, the issuing company will up your limit. However, this could turn into a viscous cycle, with larger and larger balances
- Pace your loan applications. Too many at once will affect your score, whether you are approved or not
- Keep up to date on any fee changes, and check your credit card statement every month
- Consider creating a budget to see the overall picture of your finances
- Check your credit reports regularly for errors, but more importantly, it gives you great support to see those negative warning marks shrinking
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