It is important to establish good credit young, especially in college, which is a great time to establish yourself as a creditworthy borrower. When you graduate and get a job, your credit history may be run by new employers & landlords.
Having a good credit score will also allow you to take out loans for larger purchases, such as purchasing a home or a car.
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The key is to understand the responsibility that comes with having credit and the long lasting impact it will have on your financial well-being. Here are five initial steps that you can take to establish a good credit that will take you throughout your life:
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1. Get a credit card no matter what.
This is the best way to establish a credit record. If you apply for a card without a credit history, you will more than likely be rejected. Respond to a credit card offer, which will be more than likely from a bank. In many cases, you will be offered a secured credit card. This works by giving the bank a deposit, which they keep for a year. In exchange they will give you a credit card with a credit limit of the security deposit. After a year passes and you’ve shown good usage, the card converts to unsecured. Keep in mind these cards are not very useful in the long-term; however, they are crucial for beginning your credit history.
Make sure to pay off your credit card, in full, each month. Treat it as if it were a debit card and don’t spend more than you have. Now, more than ever, your credit is in an especially fragile state and you want to have a pristine payment history.
You can easily set up an automatic credit card payment from your checking account to pay your credit card off in full each month. As long as there’s money in your checking account, it will automatically pay, saving you the stress and time of doing it yourself.
2. Become an authorized user on your parents’ card
Credit rating agencies are more than likely to give a student credit for their parents’ good record. By becoming an authorized user, the credit card will appear on your credit record as if you’ve had it since the day the card was open, making this especially powerful for cards that were issued in the past.
There is an advantage for the parents- they can monitor the credit card use and help students use the card appropriately. Parents should have the student pay for credit card charges on the card, as well as any fees from ATM’s, monthly maintenance fees, etc.
3. Pay down your card every month and keep it open
The best way to build a strong credit record is to show that you can handle your payments on time. Make sure to also stay in the credit limit. If you do happen to reach it, pay it off and keep it open. By keeping it open for a few years, this will help establish a record.
Banks take into account the age of each of your credit cards when determining your score, so you’ll want to be sure not to close credit cards. Therefore, with slight exceptions, try to pick a credit card that doesn’t have annual fees. Usually these are ‘free’ for the first year and then charge on the second year. The inclination here will be to cancel the card after your first year when the fee comes due. There are plenty of great reward cards that have no annual fees, which is a great place to start.
4. Shop around for the right card
All cards are not the same. Each card has differences in rates, fees and credit limits. While some may offer reward programs from hotels, others may offer cash back. Keep an eye out for the interest rates on these cards. Bank cards may even provide rebates to those who qualify.
5. Keep your spending in line with your budget
This is extremely important to keep your credit score in check. Don’t borrow more money than you can repay, nor take out a credit line that exceeds your income. Have a budget for what you use your credit card for and always make the payments on time. Many banks, such as Simsbury Bank, offer automatic bill pay, so you can schedule payments monthly and on time.
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