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Building Credit History
courtesy of Mint.com
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Building credit history during your college years is certainly not a requirement to a healthy financial life, but when done correctly, it will most certainly put you ahead of the game. Here are five easy ways in building a great credit history while you're young.
1. Be a college student.
Already are? Superb. College students have an almost incredible leeway from financial institutions in terms of extension of credit and tolerance to instability. For example, if you change your address frequently during the past few years, lenders may view that as a sign of instability, but if you're a college student, you will be given more elbow room as frequent address changes are more common among college students.
2. Get a student credit card.
The easiest way to ruin your credit during your younger years is to handle a credit card irresponsibly. Having said that, if you can be disciplined, this will most likely be the easiest time for a person without credit to establish credit. Lenders are willing to take a risk to extend credit to you, as you will become a potential revenue source as you graduate from college. Many times lenders also expect parents to bail their kids out. So grab a student credit card, but not too many. Just one card will do. Be aware that this is a double edge sword, and if you can't master the next step, you should avoid getting a student credit card.
Compare and contrast student credit cards at bankrate.com. Consider cards from a nation-wide financial institution such as Chase, Citi, or Bank of America as having an account from a prime lender will help your credit worthiness for future lenders.
3. Handle your credit card responsibly!
It may seem like a beaten down topic by now, but if you don't utilize your credit card responsibly, your credit will suffer in the long term.
Pay your bills on time! Some people may think it's okay to let the bill slip for a month or two and just pay it off when you have the full sum. Don't! Unlike avoiding paying Bob for that pizza last week, failing to meet your obligated payment to a financial institution will have consequences! If for whatever reason you can't pay the amount in full, at the very least have more than the minimum payment ready by the due date.
Pay your bills in full! Student credit cards have notoriously high interest rate and finance charges can accumulate easily. You do not need to keep a balance or accumulate interest in order to build credit, so pay them in full!
Charge only items that you can pay off fully within the monthly billing cycle. The minute you spend your credit beyond your earning means, you will step into a world of trouble. While you're paying on time and paying in full, keep your balances low (below 30% of your credit limit)!
Here's a simple strategy. Obtain a student credit card and charge your monthly cell phone, cable, and gym membership bills to it. Sign up for your checking account's online account and set the bill pay feature to automatically pay your credit card every month. Put away your credit card and don't use it. You're now building credit in your sleep.
4. Get a student loan if you need one.
Already have one? Perfect. When you're building a credit history, it is a good idea to have a different mix of credit accounts. Having an installment loan such as a student loan will help diversify your credit profile a bit from other types of accounts such as revolving accounts.
A credit card is a revolving account, which means that it is an account with no set term that the entire balance must be paid back. In a revolving account, your balances, credit availability, and amounts owe can change as you make payments to the account. Unlike revolving accounts, installment accounts have a fixed number of payments. Mortgage and auto loans also fall into this category.
5. Hitchhike a ride with someone else's good credit.
One surefire way to get an instant credit history is to have someone add you on as an "authorized user" on their credit card account. When you are added on as an authorized user for a specific credit card account, that account along with all its history (good and bad) will show up on your credit reports.
As with other suggestions, there are a few things to watch for. Since all the account history will transfer over, if the account you're being added onto has had late payment in the past, you may actually be hurting your credit. Choosing a responsible person will also be important, as his (and your) future credit utilization on that specific account will also reflect on your credit history.
Have your parents or trusted loved ones pick out a credit card with the longest positive history and have them add you on as an authorized user. Grab a free credit report from AnnualCreditReport.com after a few weeks and check if the account is reflected on your credit report, as some card issuers don't always report authorized users to the credit reporting agencies. If the account doesn't show on your credit report, have the person whom added you contact their issuer to see if they can report your account to the reporting agencies.
If you're a parent and you're considering this method for your child, remember to pick out a card with the longest positive history. You should also consider making limited purchases on that particular account as to keep the balances on the account low and allow easier on-time payment. Both are factors that will significantly help your child's credit history and score.
Courtesy of Mint.com. How much should I spend every month? Where is all my money going? Which credit card is the best for how I spend? These questions and more are answered at Mint.com
Take the Next Step
- Pay your entire credit card bill this month. Or at least pay off every new charge you've made plus the interest due from the old debt.
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