Good ways to build credit

Question

I'm a college junior and I'm looking to build my credit a little. I was thinking of taking out a small car loan, not too much, to build credit. I know credit cards help as well. I was wondering of more good ways to build credit.

 

 

Answer

In order to build credit:

a) you must have a debt obligation;

b) with a creditor that reports to a credit bureau;and

c) make your payments on time. 

As you make your monthly payments on time, your credit score will increase.

But your credit score and credit report is more than your history of payments. They also include information on your employment and salary, both of which make you a good candidate for a loan, and creditors—those who lend money or services—will be more willing to work with you. Having good credit usually translates into lower payments and more ease in borrowing money. Bad credit, however, can be a big problem. It usually results from making payments late or borrowing too much money, and it means that you might have trouble getting a car loan, a credit card, a place to live and, sometimes, a job.

Many people just starting out have no credit history and may find it tough to get a loan or credit card, but establishing a good credit history is not as difficult as it seems.

  • You might apply for a credit card issued by a local store, because local businesses are more willing to extend credit to someone with no credit history. Once you establish a pattern of making your payments on time, major credit card issuers might be more willing to extend credit to you.
  • You might apply for a secured credit card. Basically, this card requires you to put up the money first and then lets you borrow 50 to 100 percent of your account balance.
  • You might ask other people who have an established credit history to co-sign on an account. By co-signing, the person is agreeing to pay back the loan if you don’t.

When applying for credit cards, it’s important to shop around. Fees, charges, interest rates and benefits can vary drastically among credit card issuers. And, in some cases, credit cards might seem like great deals until you read the fine print and disclosures. When you’re trying to find the credit card that’s right for you, look at the:

Annual percentage rate (APR)—The APR is a measure of the cost of credit, expressed as a yearly interest rate. Usually, the lower the APR, the better for you. Be sure to check the fine print to see if your offer has a time limit. Your APR could be much higher after the initial limited offer.

Grace period—This is the time between the date of the credit card purchase and the date the company starts charging you interest.

Annual fees—Many credit card issuers charge an annual fee for giving you credit, typically $15 to $55.

Transaction fees and other charges—Most creditors charge a fee if you don’t make a payment on time. Other common credit card fees include those for cash advances and going beyond the credit limit. Some credit cards charge a flat fee every month, whether you use your card or not.

Customer service—Customer service is something most people don’t consider, or appreciate, until there’s a problem. Look for a 24-hour toll-free telephone number.

Other options—Creditors may offer other options for a price, including discounts, rebates and special merchandise offers. If your card is lost or stolen, federal law protects you from owing more than $50 per card—but only if you report that it was lost or stolen within two days of discovering the loss or theft. Paying for additional protection may not be a good value.

Keep in mind that credit card interest rates and minimum monthly payments affect how long it will take to pay off your debt and how much you'll pay for your purchase over time.

Suppose when you’re 22, you charge $1,000 worth of clothes and CDs on a credit card with a 19 percent interest rate.

If you pay $20 every month, you’ll be over 30 by the time you pay off the debt.

You’ll have paid an extra $1,000 in interest. And that’s if you never charge anything else on that card!

Good credit is important, now and in the future. In most cases, it takes seven years for accurate, negative information to be deleted from a credit report.

Understanding what types of information most creditors evaluate is important. Your credit report is a key part of your credit score, but it is not the only factor. You get points for other things like:

  • Your bill-paying history
  • How many accounts you have and what kind
  • Late payments
  • Longevity of accounts
  • The unused portions of lines of credit
  • Collections actions
  • Outstanding debt

You can obtain a free credit report once each year at: www.annualcreditreport.com. There are other avenues to getting your credit report. You can also contact each of the three main credit bureaus.

Credit reporting agencies don’t share files, so you’ll need to contact each reporting agency to make sure the information about you is correct. The three major credit reporting agencies are:

Equifax
1-800-685-1111
www.equifax.com
Experian
1-888-397-3742
www.experian.com
TransUnion
1-800-888-4213
www.transunion.com

In some states, you don’t have to pay to get a copy of your credit report.

Whether you shop online, by telephone or by mail, a credit card can make buying many things much easier; but when you use a credit card, it’s important to keep track of your spending. Incidental and impulse purchases add up, and each one you make with a credit card is a separate loan. When the bill comes, you have to pay what you owe. Owing more than you can afford to repay can damage your credit rating.

Keeping good records can prevent a lot of headaches, especially if there are inaccuracies on your monthly statement. If you notice a problem, promptly report it to the company that issued the card. Usually the instructions for disputing a charge are on your monthly statement. If you order by mail, by telephone or online, keep copies and printouts with details about the transaction.

These details should include the company’s name, address and telephone number; the date of your order; a copy of the order form you sent to the company or a list of the stock codes of the items ordered; the order confirmation code; the ad or catalog from which you ordered (if applicable); any applicable warranties; and the return and refund policies.

Finally, if you have a credit card, take the following precautions:

  • Never lend it to anyone.
  • Never sign a blank charge slip. Draw lines through blank spaces on charge slips above the total so the amount can’t be changed.
  • Never put your account number on the outside of an envelope or on a postcard.
  • Always be cautious about disclosing your account number on the telephone unless you know the person you’re dealing with represents a reputable company.
  • Always carry only the cards you anticipate using to prevent the possible loss or theft of all your cards or identification.
  • Always report lost or stolen ATM and credit cards to the card issuers as soon as possible. Follow up with a letter that includes your account number, when you noticed the card was missing, and when you first reported the loss.

Source: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre32.shtm