Got Credit? -- tips for establishing good credit

A bank is a place that will lend you money,

if you can prove that you don't need it.

Bob Hope

Good credit is one of those funny things in life. The better your credit is, the less likely you are to need or use it. One of my “lessons in life” is to borrow cautiously. Knowing when and how to borrow is an important skill that you will need to become financially independent. While I don’t encourage you to have a lot of debt, I do encourage you to establish a good credit record early in your life. There are three key reasons for this. Establishing good credit:

• Helps you to get the best possible terms when you do borrow.


• Teaches you important money management skills.


• Is an important character reference. Rightly or wrongly, employers, landlords and others will look at your credit as a measure of how responsible you are.

Liz Pulliam Weston has a good article on MSN Money that list 9 ways to build a killer credit score[1]. She notes that “if you’re just starting out, you have an once-in-a-lifetime opportunity to build a credit history the right way.” While I encourage you to read the entire article, I will summarize the 9 points below:

1. Check your credit report – while you may not think you have a credit report, it is possible that your information has been confused with someone else or that you have been the victim of identity theft. It also serves as a reference point and helps you understand the rules of the game.


2. Establish checking and savings accounts – these should be established as early as possible as lenders see them as signs of stability.


3. Understand the basics of credit scoring – the two most important factors used in credit scoring are on-time bill payment and keeping well within your available credit limits (use only 30% of your available credit). Also, pay off the entire balance. Carrying a balance IS NOT a key factor in building your credit score.


4. Piggyback on someone else’s good credit – this is a good strategy in certain circumstances especially when you are finding it hard to get credit yourself. Personally, I would only use this on a limited basis, if at all. You need to make sure that whoever you are piggybacking really does have good credit and that the issuer reports the history on authorized users to the credit agencies.


5. Apply for credit while you’re a college student – I probably don’t need to tell you how anxious lenders are to give you a credit card while you are still in school. Take advantage of this but remember to pay off the balance each month. When you don’t carry a balance, it really doesn’t matter what interest rate applies to the card.


6. Apply for a secured credit card – this is another last resort method to build credit when you can’t get credit any other way. Secured credit cards is basically using your own money as you are required to deposit money with the lender and your limit is usually this deposit. If you take this method, you need to make sure that the fees are low and that your credit history will be reported to the credit bureaus.


7. Get a finance company card – gas companies and department stores are usually easy to qualify for. You should apply for more than a few of these and again you need to make sure that you pay off the balance each month.


8. Get an installment loan – once you have a few years of credit card management under your belt, you should obtain auto loans, personal loans and mortgages. Credit scores are based on a mix of credit so it is important to develop a history on these credit types along with credit cards.


9. Use revolving accounts lightly but regularly – to maintain your credit score, you should have some activity in your account at least every six months.
   
   [1] http://articles.moneycentral.msn.com/CollegeAndFamily/MoneyInYour20s/9waysToBuildAKillerCreditScore.aspx?page=1