Getting started in the world of credit

The Do's and Don'ts of Establishing Credit

by Jane Atkins


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Some people decide when they start to build their credit, while others are forced to make decisions that will show up on their credit reports. Whichever way you start establishing credit, you should always keep as much control as you possibly can. If you maintain your credit and make the right decisions, you will be approved for just about anything that requires a credit check because you will have proven your ability to be responsible with your finances. When making decisions that will show up on your credit score, there are a few guidelines you should follow in order to avoid a terrible financial situation.

Dos

  • Apply for a credit card. However, don't apply for too many at one time. Every time you apply, they will check your credit report, and too many hits could put up a red flag to creditors. If you are afraid you will get denied, try applying for cards with lower or fewer requirements that you know you will be able to meet. Some department store credit cards may be easier to get, and while they won't give you as much merit as regular credit cards would on your credit report, making your payments should still give you some good marks as long as they will report your timely payments to the credit bureaus.

  • Get a secured credit card. If you aren't able to get a regular credit card, the next step you should take is to get a secured credit card. When you put down a deposit as your collateral, the creditor will give you a percentage of that money as your credit limit. This is different than a debit card because you are not spending the money you put down. Instead, you use the card just like any other credit card, and you pay off the balance you spend at the end of every month. Again, as long as timely payments are reported to the credit bureaus, you should see an increase in your credit score.

  • Create a monthly budget. Budgeting is the most basic way that you can help get your finances in order, but it is also the most effective. When you know exactly how much money you have to spend every month and you make the daily decision to stick to that budget, you will be able to live below your means, save money, and build your credit effectively.

  • Check your credit report. You can't know if you are doing well with your credit if you don't take the time to check it. Every year, you are allowed to get one copy of your credit report for free, and you should review that copy to make sure all of the items stated are true. This will allow you to see if your identity has been stolen or if there are any outdated or false items that need to be removed. If you should find these types of false statements, you should report them immediately.

Don'ts

  • Don't overdraw on your bank account. Not only will the bank make you pay a fee, but you could also lose a good reference.

  • Don't miss a payment. Use your credit card only when you know you will be able to pay it off by the end of the month. Carrying a balance on your credit card will cause your credit score to drop very quickly. If you must carry some of your balance, try to make sure it is at least less than 30% of your credit limit, and make more than the minimum monthly payment until you pay it off completely. If a creditor sees that you are trying to pay off your debts and spend your money responsibly, they will see you as less of a credit risk.

  • Don't overspend. When you use your credit card as a way to live from day to day, you run the risk of becoming dependent on that extra money that you actually don't have. Instead, try using your debit card or cash to pay for things. Again, don't buy anything on your card unless you know that you will be able to pay it off as soon as you get home. You can wait until the end of the month to make your payment, but make sure you leave enough cash in your checking or savings accounts to pay it off.

  • Don't give your card information to untrustworthy sources. When you talk to people over the phone or online, you never know exactly where they are, who they work for, or what they will do with your information. If you do give out your credit card information, make sure you initiate the interaction with that person and that they can be trusted.

Jane Atkins is an author who writes guest posts on the topics of business, marketing, credit cards, and personal finance.

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