This article will examine some of the problems consumers face and 7 tips to establish or rebuild good credit. Establishing good credit is a must in today’s society, but it can be a challenge. Good credit will help you qualify for loans, auto insurance, rental applications, cell phone plans and can even affect whether you get a job or not. It is used as a measure of your integrity and trustworthiness…How do you manage your finances? Do you keep your commitments?
To build good credit you must be financially responsible. It requires discipline. Many have been caught in the trap of putting everything on plastic only to find out later that they don’t have the resources to pay their debts. Some engage in playing musical credit cards, using one card to pay the debt on another, so it becomes a never ending cycle. Especially the younger generations, know to be a generation of instant gratification. In some instances you have to have credit, cash only is not an option. Credit cards are required for most online retail transactions, car rentals, hotels and airline tickets, etc. Many consumers are sucked in by rewards and perks offered in exchange for using their credit, airline and hotel miles are a great example. But one needs to consider what those perks are actually costing them in terms of interest rates and annual fees. Prior to the recent changes that come with the Credit Card act, every college student would be bombarded with credit card offers before they got out of school, even if they didn’t have a job. Resulting in a ton of debt even before the student graduates and obtains a job.
Unfortunately, recent generations have found that their parents, who have experienced financial hardship or financial irresponsibility, have used their children’s social security numbers to gain additional credit. Consequently, the child’s credit history is tarnished before they have even graduated from high school or college.
In today’s economic climate, we have seen credit issuers tighten the reins on credit. In order to extend credit they want to see a reliable credit history to reduce the likelihood of default. But how does one establish a credible history if one can’t get credit to start with. It’s a catch 22. I will outline some tips that will be useful for those seeking first time credit cards trying to establish credit as well as those that have experienced financial hardship through no fault of their own, and even those that are trying to rebuild their credit.
7 Tips for Building Good Credit
1. For parents with a good credit history, students can become authorized user on their parent’s accounts. This will allow the parents to monitor and track their students spending habits, and use this time as a learning experience, especially before they go away to college. With recent changes in the Credit Card Act, persons under the age of 21 require a co-signer or must show proof of income if they want to obtain a regular credit card in their own name. If they can’t show that they can pay their bills on their own, they will not be issued a card.
2. If you have a job and can show proof of income, then you can apply for a card in your name. If you are able to obtain a card, then you are the only person financially responsible. You must pay your bills and pay them on time. Ideally they should only be used for emergencies. If you make purchases just because you have the card, when you truly have an emergency you won’t have the funds available to take care of your situation. Live within your means!
3. When applying for a credit card, shop around. Don’t sign up for the first offer you receive in the mail. Check to see if the card has an annual fee, check the interest rates, late fees and grace periods for payment. If you are not able to make payments when due and must carry a balance, then you will want a card with low interest rates. This will rule out some of the Rewards credit card offers which tend to carry higher interest rates and/or annual fees. You want the card with the lowest interest rate and the most benefits.
4. A more viable option for many is to get a prepaid Visa or MasterCard. You can only spend what has been loaded on the card. Thus you experience the convenience of a credit card without going into debt. It is an easy way to track spending habits. A prepaid card eliminates bank overdraft fees and account minimums. It is easy to add money to prepaid cards, many offer features such as free direct deposit, bill pay, and account email/text alerts. There are no interest rates and the cards can be used at ATMs to withdraw cash when needed, in addition to reporting to the Credit Reporting Agencies allowing you to establish a good credit history.
5. The next option is a secured credit card. The secured credit card differs from the prepaid card in that a security deposit is required to get the card. Some issuers will extend a credit limit equal to the amount of the security deposit; others may extend some multiple of the deposit, i.e. if you deposit $200 they may give you a $300 or $400 limit. The money that is deposited belongs to you and will be returned if you ever decide to close the account with a $0 balance. Unlike the prepaid card, to establish or rebuild your credit history it is essential to make your payments on time, paying no less than the minimum and not exceeding your credit limits. If you do this, you will eventually be able to qualify for a regular credit card.
6. Next, use your credit cards wisely. Only use for small, occasional purchases that you can afford to pay when due. If at all possible pay off the bill and do not carry balances to avoid interest charges. Also it is important that you do use the card. Having a card and not using it may lead the issuer to close the account; so you can’t establish a good history without activity. You can use it to pay a bill that you have every month such as a phone bill or utility bill.
7. Reserve large purchases for emergencies only! Too many people get into trouble because they can’t pass up what they consider a good deal and use their credit cards for things that are not necessities, but wants. When a true emergency occurs and they need to access their credit. They don’t have sufficient funds available. Things happen you get a flat tire, need a new battery or lose your cell phone. A loved one becomes ill or passes away and you have to take an unexpected trip. Again this requires discipline, use your credit wisely. If you can’t afford to pay the bill off at the end of the month you probably don’t need to make the purchase. Of course there are always some exceptions.