Establishing Credit

Establishing credit  (WC 774)

Because we as a nation run on credit, the single most important thing you can do is establish a good credit rating early on in life, and then working hard to maintain that credit.  Credit can be a blessing, or you own worst nightmare.  Here, we discuss ways of establishing a good credit rating and history.

In the beginning

Establishing credit early on in life is a very important objective.  At age 18, plans should be in place to accomplish a credit rating and history.  Many students rely on their families to provide credit for them.  College kids especially carry a credit card given to them by mom and dad, and use it for even tiny purchases.  This doesn't help them once they are on their own.  Responsible parents should teach their children the value in having good credit and maintaining it.

The first step

At age 18, most young adults have little need for credit.  They often work at service jobs, and pay cash for their needs.  This can be remedied by first attempting to get a gas credit card.  Many large gas companies issue them, and they can be used for purchase of gas and oil and even tires.  Keeping the balance within your budget so that you can pay it off each month is essential in establishing credit.

Get a loan

Apply for a small loan at a bank.  When I first begin to establish credit, I borrowed $300 from a local bank for 90 days, and promptly deposited the money in the bank across the street.  At the end of the 90 days, I took the money out of the second bank and paid the first, along with a small amount of interest.  I continued this practice until I was able to borrow $10,000.00 on my signature alone.  A good tip here - ask the bank you secure a loan from if they report to a credit bureau.  If they do not, then the credit you establish with them does not go on the record.  Your goal here is to make your good credit a matter of public record.

Open a savings account

You gain a lot of credibility with a lender if you have a savings account, and contribute to it regularly. Include a checking account along with this so there is a paper trail of payments made and on time.  Just as important here is to never over draw the account, or write checks that bounce.  This sends a clear signal to your lender that you cannot handle your finances on a steady basis.

What if I can't get a loan or credit card?

Don't despair here.  Get a family member who has outstanding credit to cosign with you on a loan.  Consider the purchase of a good used automobile.  Make a large down payment, even if you must borrow the money from family, and pay the loan off insuring that payments are on time. 

Rent an apartment

Renting an apartment is a good way to establish credit.  You will have a credit history of making rent payments on time.  You will also have the opportunity to often get utilities, such as telephone and electric, in your name.  If you don't have a phone, many creditors look at this as a sign that you may be unreachable, and will refuse credit.  Making payments on utilities helps establish credit if you make these payments on time and pay the full amount.

Be responsible

Having a credit card makes it easy to purchase things on a buy now pay later basis.  According to NBC nightly news, surveys show that people buying with credit cards often spend twice as much as they normally would if paying cash. Don't fall into this trap - spend only what you can afford to pay off when the credit card bill comes due.

Don't apply for credit cards because the credit card company offers a great reward for signing up.  This offer is usually covered by high annual percentage rates (APR) or a higher than normal annual fee.

Keep spending on track.  Record all your purchases religiously, and make this a priority.  Nothing puts things into perspective more than looking at purchases made during a month's time.  Credit card holders often make the mistake of using their credit card for minor purchases even though they have the cash at the time of purchase.  Remember, you have to pay interest on the unpaid balance, and this can add up over a year's time.

Although establishing credit takes time, it is an essential element of daily life.  Follow these practices and you are well on the way to good financial stability.