August 2, 2012
How to establish good credit
Good credit is a must for men and women hoping to secure their financial futures. But before a young person can maintain a good credit history, he or she must first establish good credit.
For young people, how to establish good credit is often a mystery. In fact, many young people might be unaware that the way they use their credit cards today can have repercussions for years to come. Those repercussions can be positive or negative, depending on how young people approach credit. There are several ways young people can establish good credit and put themselves in a positive light with potential creditors, both in the present day and in the future.
• Consider a gas card. Most gas companies offer credit cards that can be used exclusively at their gas stations. For young people with limited or “thin” credit histories, these cards can make a great initial foray into the world of credit. Often easier to get than traditional credit cards, gas cards come with much less risk than traditional credit cards, and young people looking to build credit can use them as a solid starting block to building their credit. One thing to be mindful of, however, is the interest rates on these cards. The interest rates on gas cards are typically higher than those on general-use cards, so young people need to be especially diligent and pay their monthly bills in full each month.
Another potential drawback to gas cards is that not all card issuers report on-time payments to the credit bureaus. Such reports are integral to earning a high credit rating, so this could be a significant drawback to men and women with thin credit histories.
• Apply for a loan. Bank loans or loans from a credit union are another good building block for people with thin credit histories. So long as borrowers make each of their monthly payments on time, those payments will be reported to the credit bureaus. This is better than simply depositing money into a savings or checking account, as such deposits will not be reported to a credit agency and will have no effect whatsoever on a credit rating.
For those borrowers who can’t secure a loan on their own, which is increasingly common in today’s economy, securing a loan with a co-signer is another alternative. Making payments on such a loan on time indicates to prospective creditors that a borrower is responsible and worthy of securing a loan or credit card on their own. When signing up for a loan with a co-signer, it’s essential that borrowers know the bank is not the one assuming the risk. Instead, it’s the co-signer, be it a parent or other close friend or relative, assuming the risk. One should not put a co-signer’s finances and credit rating at risk by missing payments or defaulting on the loan.
• Apply for a secured card. A secured credit card is similar to a standard credit card but is first secured with a deposit. To get a secured credit card, individuals must first commit ‘X’ amount of dollars. For instance, if a card holder puts up $500, the limit on the card will then be $500. If this seems a bit odd, it’s really an avenue by which young people with thin or nonexistent credit histories can get started on establishing credit. The issuer of the card has no risk, and the “borrower” gets to begin establishing credit and learning to use credit without the fear of overdoing it and falling into extensive debt.
Establishing good credit isn’t easy. But young people who approach credit responsibly with a goal toward building a financial future will discover that the benefits of good credit are endless.