Establishing Credit The Right Way
Having good credit is especially important today. It can affect whether you get a job, rent an apartment, obtain insurance and are worthy of big-ticket items such as an automobile or new home. Companies use your “FICO” score to see if you are a good credit risk. Numbers usually fall between 300 and 850. The higher the number the better risk you are.
Several factors are looked at by The Fair, Isaac and Company to ascertain your credit score: past payment history, amount of credit owing, length of time credit established and the type of credit established, to name a few. It is important to periodically look at your credit report to make sure the information reported is accurate. If you find errors, you are entitled to have it investigated and corrected by the credit bureau at no charge.
Establishing credit in our day and age is somewhat of a catch twenty-two. The days of getting a loan on a handshake are long gone. Before a bank or other institution will lend you money, they want to know that you are credit worthy, but until someone will lend you the money, you can’t prove it to them. There are steps, however, you can take toward establishing your first credit.
The first step is to open a bank account and use it responsibly. Create a relationship with your bank. Do not overdraw your bank account. Don’t let other people use debit or ATM cards. You are responsible for what they do with it.
An idea to establish a payment history is to get a department store or oil company credit card. They are easier to obtain than a Visa or MasterCard. Establish a payment history before applying for another card, but keep in mind that these cards often have a higher interest rate than other cards so use it wisely. Be diligent with your payments, as late or missed payments will undo your efforts to build a credit history. Carrying a balance on a department store card isn’t a bad idea, because it shows you can handle an outstanding balance. A gasoline card should be paid off monthly otherwise it may convey the message that you can’t keep current on your gasoline purchases.
Be careful about how often you apply for credit as that too shows up on your report and can affect your score. Be fairly certain that you are ready and need it before taking that next step.
A second approach is obtaining a secured credit card. With a secured card, you place a deposit with the card company and they provide you with a credit card. Typically, the credit limit is equal to the deposit. If this secured card is through your bank, after you use the card and are diligent about making timely payments, they may consider switching it to a regular card.
You can also ask someone who already has a good credit history, perhaps a relative, to co-sign on a credit card with you. Keep in mind that your credit is now linked and anything that you or they do will affect both of your credit so be sure that the relationship is not violated. Remember, the co-signer is responsible for your debts if you don’t pay.
You can open a charge account with a local business. This is an agreement that is designed to be paid off each month, unlike a credit card. After you have a relationship with this company, ask them to report to the credit bureau. They may do this for you as a courtesy.
Once you start down the road to open credit, use it cautiously. The average American carries a dozen credit cards, far more than they need. Even if the cards are paid off, it will affect how much a mortgage company will let you borrow because you could “max them out” after you are approved and then may not be able to make your payments. Keep only the cards with the best deals and notify the credit card companies in writing that you want the account “closed at the customer’s request.”
For more information on credit visit the Federal Trade Commission website at www.ftc.gov or call them at 1-877-FTC-HELP. American Express offers free consumer booklets on a variety of
credit subjects at www.americanexpress.com.
Know your FICO score? Remember, Plattsburgh Housing Outlet offers a FREE copy of your credit report with no obligation, a $12.95 value.