How To Establish Excellent Credit

Building credit is just like building anything else. You have to start somewhere and if you go slowly, carefully, and a little at a time, and have a plan, you’ll be more likely to be successful.

Anyone who is going to trust you with money is going to want to know if you’re good for it. So, how do you convince them that you are? You have to establish a track record. You do that by paying your rent on time, in full. (Keep your receipts or get a statement from your landlord.) Pay your utilities on time and in full. Keep the bills/statements. One painless ‘filing’ system is to use a 3-hole punch on your statements and put them in a binder. Keep the punch and the binder right where you open mail and pay bills.

Show employment stability. Try to stay with the same employer for at least a year. At least make sure you don’t have a lot of employment gaps. Same with your residence. If you job-hop, do it after you have some credit established.

Open a savings account if you don’t have one already. Pay yourself first. Every pay period, put the same amount of money into your account and leave it there. That money shouldn’t be touched except for a life-or-death emergency.

Buy something from a local retailer that reports to one of the major credit bureaus. Make the purchase just large enough to put on credit, small enough that you can handle the payments with no problem (set aside the cash in advance so you know you can make the payments no matter what), and be sure it’s something you really need, and plan to keep for a long time.

After at least six months of paying faithfully, talk with your banker about what you are doing and sound out the possibility of a credit card. They may suggest a secured card with a credit limit of 50% to 100% of your savings account balance. Or maybe a small loan, which you could leave in your account until you pay it off. Either way, it’s going to cost you interest. If you’re late in making payments, that’s a negative on your credit report.

Stay in control of your credit. Use the card for your convenience only, not for instant gratification. Now for the weird part. Once you have established credit, you’ll want to apply for several more cards. The reason is, credit limits are cumulative. If you have one card with a fifteen hundred dollar limit—that’s the credit you’re ‘good’ for. If you have three cards, each with a fifteen hundred dollar limit, it’s assumed you’re good for forty-five hundred dollars, even though you spread onto three cards the purchases you used to put onto just the one.

The longer you show how responsible you can be, the higher your credit limits will go (not that you’ll use them, right?) and, theoretically, the lower the fees should be. You will be in a good position to shop for good rates once you’ve established yourself. Then, when you go to buy a house, you will get the best rates for your mortgage. After all, that’s what this is all about, right?

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