This month's life tips is over Building Credit.
This is so important in life. When you leave high school, you likely won’t have any ‘credit’. What I mean is that you don’t have any credit history. If you want a loan or want to rent a place, when they run a credit check on you, nothing will show up. That leaves them standing there with no information to go on about whether you would be a good investment or a good renter. They don’t want someone who is going to miss payments and get in trouble. Having good credit (ie good credit history) means that you have dealt with payments before and been good about them. It means you pay your rent and your car payment on time. Over time, this builds good credit, which may earn you a better interest rate when you buy a car or property later on! (Plus being responsible about your payments and other responsibilities is just good all around, and makes you more mindful of your finances) Actually, I know someone who had saved enough money for the purchase of the used vehicle he wanted but because he wanted to add to his credit, he got a loan for several thousand dollars anyway. He simply paid it back extra quickly so that it would contribute to his credit. Most people wouldn’t think to do that or wouldn’t be able to, but it was a crafty idea!
How to build good credit? One common way is to get a credit card - the the key is that you use it wisely. Don’t spend more than you can pay off. Remember, the way a credit card works is it allows you to BORROW money from the bank which then you have to pay back. When you get a credit card it will say what your credit line or limit is, essentially the maximum amount you can charge on it. Depending on your credit and perhaps other factors, it could vary from under $1000 to several thousand or more! This can be really helpful for big purchases like a new $4000 sofa for the house which would benefit from the flexibility of paying it over some time, but generally you should pay off most or all of it every month. If you have some credit built already, you can probably get a regular credit card. If you aren’t there yet, there are some options to start off and work up to it! There is the route of getting a secured credit card, which means you pay a deposit (likely the amount of your credit limit) which they can use if you fail to make a payment. Another option is to get a co-signer (typically a parent) but remember that by having them co-sign, their name is also responsible for this credit card account, so all the more reason to use it responsibly. A third way where you don’t get your own account is to become an authorized user on someone else’s. I know someone who has his teenage daughter as an authorized user of his account with a copy of his card. This allows her to use it and start putting some use to her name while leaving him as the one legally responsible for the charges.
Two more ideas are to get credit for the rent you pay, and a credit-builder loan. Look around online to read up on these!
- Pay on time, every time
- Pay off the full amount or as much as you can - NEVER pay just the minimum required payment!
- Don’t open too many accounts; that can bite you in the rear with spending, making payments, and also having ‘young’ accounts
- The ‘age’ of your accounts does play a role - older accounts look more steady and reliable to lenders
- Look at the interest and any fees (avoid cards with fees if possible)
- If you get a card or new bank account, you can typically download the app for your mobile device to track your charges and other helpful information. Some even show your FICO credit score, such as Discover.