It's a classic Catch-22: You have to have credit to get credit. The elusive score determines much of your adult life: not just obtaining loans and credit cards, but also getting a decent apartment, car and even insurance rates. And, just as jealous boyfriends often plague new romantic relationships, companies are weary of putting their precious money on the line for someone who hasn't yet proven herself trustworthy. Sound dire? Don't start hiding your money under your mattress just yet - now's the time to start building credit, and building it right. Here's how:
1. Establish a checking and savings account.
This is the first step to showing those weary banks that you're worthy of their trust, and the earlier you do so, the better. Not only will this allow you to start building up a tangible history of what you do with your money, it will get you used to being responsible for what you save and what you spend. (Trust us- it's a little more difficult to spend $10 on lunch everyday when you have to see it staring you in the face on your bank statement.)
2. Get a credit card early.
Today's savvy college students have been warned to steer clear of those fast-talking, freebie-offering credit companies that pop in your mailbox. Broke and innocent undergrads are an easy target for companies that make their money by sneakily charging killer interest rates. But as long as you're smart and responsible about it, college is the best time to get your first (and only!) credit card. According to Liz Pulliam Weston, of Money Central at MSNBC.com, "Lenders are willing to take risks with you that they won't once you graduate," but, she cautions, "look for a card with a low or nonexistent annual fee and low interest rates."
3. Understand the basics of credit scoring.
"The problem for younger consumers is that without a solid credit history, their score will not be high enough to obtain credit at competitive rates," says Adam Levin, CEO of Credit.com. According to his site, your credit score is a numerical evaluation of your credit history used by businesses to quickly find out if you pose a risk to the company as a borrower. Is your brain hurting yet? All you need to remember are the factors that will raise and lower your score:
It rises if you pay your bills on time, have one or two loans, keep your credit card balances low, have a stable record of credit use, keep your accounts open for a long time and avoid too many applications for new credit.
Your score lowers if you pay your bills late, have an excess or a lack of accounts, max out your credit cards or apply for a lot of new accounts. It's a lot to keep in mind, so if all else fails, take Weston's advice: "Paying your bill off in full is the best way to keep your finances in shape and build your credit at the same time."
4. Don't have a credit card to build credit?
"There are a number of ways that consumers can establish credit," says Levin. One way is to get a secured card. "If you deposit $2500, the bank will then issue you a secured credit card with a credit limit of $2500. The bank is guaranteed that you will not miss a payment because you have essentially prepaid for any amount you charge up to your limit," he says. While you are building credit, and will eventually reach a high enough credit score to merit approval for an unsecured card, the deposit you've made on your secured card is off limits while in use.
Another popular method is to get a retail card from stores like Macy's or The Gap. "Retail cards are generally much easier to obtain even if your credit history and credit scores aren't in the best shape," says Levin. Although quick payments on retail cards facilitate a positive credit history, there are limitations on where the cards can be used, and the interest rates can be very high. "Paying them off quickly is a must," says Levin. "The line they love to give you is 'if you open one today you'll save 10%,' which is nice, but then they'll slaughter you with your interest rates later."
This article was reprinted with permissions from SavvyMiss.com, the free website community dedicated to connecting, empowering and informing women.
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