How To Build Good Credit
By The FoolProof Team
Building good credit is important to planning and managing your finances because a positive credit history will enable you to expand your buying power. For example, in the near future you may wish to borrow money to make a fairly expensive purchase in life such as a car or computer system. Many apartment owners also check applicants' credit reports before agreeing to rent apartments. If owning a home is a future goal, you'll need a good credit history to obtain a mortgage.
The following pointers can help you get started while you're still a student.
First, educate yourself about credit and credit management.
Surveys of high school students conducted by such groups as the Jump$tart Coalition for Financial Literacy and the National Consumers League show that many teens have little understanding of personal finance and financial tools such as credit. For example, in the NCL's 2002 survey, 52% of teens 14-18 wrongly indicated that a credit card was an "informal agreement to pay money owed." Not knowing that a credit card is a legally binding contract that requires the borrower to pay the money owed can lead to big problems.
So first review the basics about credit and credit management provided by this credit union.
Steps for building credit as a high school or college student.
On this website we offer steps that anyone can use to build credit. In keeping with these tips, experts recommend the following steps as appropriate to young adults in high school or college who are just starting out.
Open a checking account.
Although checking accounts aren't "credit," checking and savings account history can be included in your credit report. Keep the checking account active and manage the money carefully—don't bounce checks. If you are new to managing a checking account, think twice about using a debit card with it because it's harder to keep track of what you've spent. If you do use a debit card, save receipts and write each debit in your check register immediately.
Apply for and receive a credit card.
To build credit you will need to hold the credit card in your own name, not in a parent's name, although a parent or other adult may need to be a cosigner. Where can a teen find a card? Then, call this credit union, whether you are a member or not, and ask for the credit card department. Ask them if they have any type of "starter" credit card for people your age.
You may also find that applying for a store credit card at a department or specialty store where you shop regularly is an option. Be sure that the company reports the status of its accounts to credit reporting agencies. A secured credit card is another option. Secured credit cards require that you place a certain amount in savings. They typically have smaller credit lines and higher interest rates. A secured loan is guaranteed by the money you have in a savings account.
After you receive the credit card, make only small purchases, and pay the bill in full when it arrives and well before the due date. Doing this regularly over time helps build your credit history as a prompt payer. Never be late and never skip payments. Don't fall into the seductive traps of credit card-overspending and/or making minimum payments. By paying off the balance in full each month, you probably won't incur a finance charge "interest charged on an outstanding balance," but it's still important to keep rate in mind when shopping for a credit card. See our tips on "Using a Credit Card Wisely."
Secure a small loan for a planned purchase.
If you are working or have been saving toward a middle-sized purchase such as a computer system, you may wish to consider taking out a small loan to pay for it. Again shop your rates, the retailer may offer a loan plan but interest rates are typically very high. Explore what this credit union may offer. A loan cosigned by a parent or a loan secured by a saving account are all options offered by most credit unions. To build good credit, make all loan payments on time; don't be even a day late.
What about an auto loan?
A number of dealerships offer special programs for first-time buyers. The objective of the dealers and manufacturers is to make young buyers life-time customers. Eligibility requirements (including age) vary. But if you're eligible for a dealer's "first time buyer" program, you're usually eligible for a loan from the credit union or bank. The important thing to remember is to shop for any auto and its financing using the approach recommended in our Information Edge Car Buying Guide. Be sure to compare all financing rates and terms.
More good information on credit:
- FoolProof Solo
FoolProof is a painless way to increase your IQ about money, credit, and the realities of the Free Enterprise system.
- "Good Credit - Build it and keep it"
A fact sheet that explains what credit history is, what a credit report is, how to get your credit report, how to establish good credit and where to complain if you have a problem.
- "Are You Seeking Credit or Charge Cards? Will You Be a Good Credit Risk?"
Taking this Credit Risk Profile from the Institute of Consumer Financial Education can help you check your financial savvy before you get a card or as you start to use it.