How To

Learn To Build and Manage Your Credit, While You’re Young

Everyone tells you that these are the best years of your life. But the rest of your life can be even better if you start building credit now and working on your debt planning. Next time you try to rent an apartment, ask for a loan, or apply for a job, you’d do well to come armed with the same information that your creditors already know about you.

Here are the raw stats:

Every business reports your financial management activities to the three major credit bureaus—Experian, TransUnion, Equifax. Your financial activities dictate your FICO (Fair Isaac Corporation) score, ranging from 300 (worst) to 850 (best), and this is what lenders, landlords and employers use to determine your credit risk. The lower the score the more likely you’ll be considered a risk. It also dictates interest rates. A low score can mean thousands more in interest payments, as you can see in this table:

Here’s how FICO scores affect rates based on a 3-year auto loan for $15,000.*

FICO Score APR Monthly Payment
720-850 6.948% $463
690-719 7.779% $469
660-689 9.250% $479
620-659 10.692% $489
590-619 13.988% $513
500-589 14.785% $518

*from myfico.com

Your credit history can haunt you for the rest of your life so it’s a good idea to follow this easy three-step-plan to build, maintain and (if you must) repair your credit.

#1 Build Your Credit

Open Checking/Savings Accounts: You can open an account for as little as $10 at some banks. The ability to maintain your accounts will show lenders that you can reliably handle money. Opening an account is particularly beneficial for those who haven’t already established credit. Bounced checks mess up your credit report, so use that check-writing feature wisely!

Apply for a credit card: Part of your debt planning should include determining what type of credit cards you should sign up for. Get a credit card with low interest rates (not just intro rates), no annual fees, and a generous grace period. Try not to carry a balance so you don’t end up paying interest. Retailer cards are easy to get but have high interest and worse penalties, so only get one if you’re able to pay in full each month. Secured cards require a deposit, which becomes your limit. Be careful about missed payments as they come out of that deposit. Be aware that secured cards also have high interest rates.

Don’t get lots of credit at once: When you get credit, it goes on your report so if you open many accounts at once, they drag down scores and worry lenders. Even applications stay on your report for two years. If you need more than one card, wait six months before opening another. Wise financial management practices dictate that you use your first card responsibly, especially during the first six months; doing so will allow you to get better rates on future cards.

Piggyback on someone’s credit: If family members with established credit add you to their credit cards, your credit will reflect upon theirs. Conversely, so-so or bad credit from your family members may be something you’ll inherit as well, if you sign on as additional members and users of their credit cards.   Also, if they co-sign a loan with you and you default, you’ll be impacting their credit, so be careful. 

#2 Maintain Your Credit

Get Your Credit Report: Use annualcreditreport.com to get all three reports once a year for free. If you find mistakes, immediately contact the credit agencies since discrepancies stay until you take care of them. If your report is bad due to debt, start working on repairing your report. Avoid companies that offer to fix your credit:  many are reputed to be rip-offs and have been reported to use illegal practices. The only way to improve credit is to pay debts and dispute false charges.

Mint Tip: If there are unauthorized charges and you suspect identity theft, immediately visit the Federal Trade Commission Identity Theft Site.

Get Your Credit Score: Although you can receive credit reports for free, it’s not typically the case with credit scores. Credit scores cost $15.95 at annualcreditreport.com or myfico.com. Cheaper sites calculate their own scores, and are often inaccurate. Just like credit reports, you have three scores. Check all of them if you’re making a major purchase. You don’t want to get caught off guard if the lender checks one that you weren’t able to review beforehand.  Recently, a new service called CreditKarma.com was launched to provide free credit scores to the public. The downside?  You’ll have to supply your personal information to this new company before you’re able to review your scores.

Don’t close old accounts: Once you’ve paid off your credit card accounts, don’t close them off!  Older accounts will show that you have long-lasting credit history, and this will indicate that you have financial stability. If you close your available credit, it’ll raise your debt-to-credit ratio. 

#3 Repair Your Credit

Pay in full every month: If you carry a balance, you’ll pay interest. If you’re unable to pay in full, pay at least the minimum on all debts. Paying at least the minimum will improve your credit history and score, which will give you leverage for lowering your interest rates.

Pay on time: Late payments mess up your report for years. It can also raise interest rates. Any late payments you make on any one bill will affect the interest rates you have across all your credit accounts. If you have trouble remembering due dates, have Mint remind you when bills are due and set up auto-bill pay online through your bank.

Lower your debt-to-credit ratio: Your debt-to-credit-ratio is what you owe versus how much credit you have. If you owe $5,000 and have $10,000 in credit, your ratio is 50%. The lower the ratio, the better. Aim for a ratio that’s less than 30%. A quick way to lower it is to increase your credit line; but, don’t spend more just because you happen to acquire more credit.

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