Personal Finances 101: Tips for Establishing Good Credit
Paying off your credit card each month goes a long way toward building good credit.
If you want to take advantage of the low interest rates on home and car loans, or the special perks for the best credit cards, you usually need to have a very good credit score. Good credit can also help you when you're applying for an apartment or a job, as employers can check your credit report as part of the application process in most states. Building a good score isn't something that happens overnight, but by establishing a positive credit history, you'll put yourself in a position to reap the financial benefits in the future.
Tip #1: Use a Credit Card
Credit cards aren't all bad -- despite what you might hear or see on the news. Used responsibly, a credit card can be the first step to establishing good credit. If you haven't established much credit yet, Sophia Bera, a Certified Financial Planner practicing in Minneapolis, Minnesota, recommends "that you try to get one credit card that you put one small purchase on each month, and then pay it off every month" to build credit. "You might need to start with a student credit card or a 'secured card.' A secured card means that you have to fund your credit line. For example, you would go to your bank and ask to apply for a secured card and then you'd use $300 of your own money as the line of credit." After six months of using the card responsibly, you may be eligible to upgrade to a traditional credit card.
Tip #2: Pay on Time
When you break down the credit scoring factors, a whopping 35 percent of your score is determined by your payment history, so paying on time, every time, is critical. Once you've got a card, "Set up automatic payments so that you always pay your bills on time," advises Bera. That way, even if you're out of town or just plain forgot about the due date, your credit report still shows you as paying on time. However, you don't need to carry a balance to boost your score -- it will just cost you interest without benefiting your credit.
Tip #3: Check Your Credit Report
"Get a copy of your credit report at www.annualcreditreport.com and check for errors," advises Bera. "Make sure that there isn't an error that's dragging down your credit score." The Fair Credit Report Act, a federal law, entitles you to one free credit report every 12 months from each of the three credit bureaus, Experian, Equifax and TransUnion. If you find any errors, tell both the credit bureau and the creditor, such as your credit card company or bank, in writing about the error and include copies of any evidence you have supporting your position. Checking your report is also a good way to see if any of your accounts are in collections, notes Bera. "If so, work out a payment plan with your creditors ASAP so that you can remove this negative mark on your credit."
Tip #4: Don't Apply for Too Much Credit
Each time you apply for credit, such as a new credit card or loan, the lender pulls your credit report to make sure you're a trustworthy borrower. Each time a lender pulls your score in response to an application, an inquiry goes on your credit report. These inquiries account for 10 percent of your credit score. Once you've established your credit, this category has a smaller impact on your score. However, when you've only been building your credit for a short period of time, the Fair Isaac Corporation warns that opening lots of accounts in a short period of time will have a bigger impact on your credit score. But don't worry: checking your own credit report won't affect your score.