How To- Establish Credit

You should start building your credit as soon as you turn 18. Many young adults learn this lesson after being turned down for a necessary purchase, like a car.

The easiest way to build your credit is to be added as an additional card holder on a credit card for someone who already has established credit. This could be anyone, but tends to be a parent or other close relative. They do not even have to give you the card with your name on it. Once the card with your name is received it can be cut up and discarded. Or maybe they will hold the card should you need it in the future.

If you do not have someone willing to do this, an alternative is to open a credit card with the bank you have your checking and savings accounts with. Make small purchases you know you can pay back, and do this on a regular basis to establish your creditworthiness. If you pay the balance before the statement closing date you will not have to pay any interest. Check your credit score regularly. There are many sites that do not appear on your credit report and once you see your score has increased to above 650, you can request credit cards from other sources. See “How To- Choose a Credit Card” for information on choosing the best credit card for your needs.

If, as in the introduction, you discover that you do not have sufficient credit to purchase a car or some other large loan, you will have to find a co-signor. This person is putting a lot of trust in you. If, for any reason, you do not pay your loan, the co-signor will either have to make the payments or his/her credit score will be impacted. If you default on the loan, the lender will take action against both of you. Should the collateral be repossessed and there be an outstanding amount due to the lender, the lender will place liens on both of you. If you need a co-signor, you should offer to give the co-signor a promissory note detailing the date, total, and monthly payments for the loan, and your promise to pay the co-signor in full for any payments the co-signor makes on your behalf. Then ensure you never have to use this promissory note. Whatever you have to do, you will make these payments first. Continue to check your credit score and obtain a loan in your name only as soon as possible to replace the loan containing the co-signor. This will justify the co-signor’s trust in you and make it easier to borrow money from him or her should you need to in the future.

You will make mistakes with your credit over the course of your lifetime. You may find yourself in a situation where you are living off of your credit cards and unable to pay them off each month. You may find yourself in massive debt. There are any number of ways you can find yourself in credit crisis mode. The good news is that your credit score can be rebuilt as easily as it crumbled if you are determined to make it happen. See “How To- Pay off Credit Cards” for more information. Talk to your creditors and see what kind of agreement you can make to pay down your balances. They may freeze your credit line and not charge you interest during an agreed-upon time period. If you do not feel like you can do it yourself, you can also visit consumer credit counseling services, a not-for-profit debt consolidation service that can help you work with your creditors to create a plan acceptable for both you and your creditors. Just make sure you are working with them and not some similarly-named company that will take advantage of you.

Here are some basic definitions:

APR– annual percentage rate- you will most likely be charged interest on your loan. This is the fee you pay the lender for the convenience of using the lender’s money. How much interest you pay is call the APR. You want this percentage to be as low as possible. Usually, the better your credit score, the lower the APR.

Co-signor (also known as a Guarantor)- the person who is promising to pay back the loan if you do not. This give the Lender additional assurance that it will receive its money back in full with interest.

Credit Card– a form of payment where you are making purchases using someone else’s money. You will have to make minimum monthly payments, including interest, until the balance is paid in full. Depending on the terms, this could easily be 3-4X the original purchase price. Many credit cards now offer rewards programs, making them lucrative if used wisely.

Credit Score– this is a score from 300-850, where higher is better. You want to have a minimum 700 score to get the best terms and offers. 800 is considered excellent. Your credit score changes daily and is based on your total available credit, what percentage of your credit you are using (ideally, you should be utilizing no more than 20% of your available credit), how old your oldest credit line is, how many times your credit score has been accessed in the last two years, how many new lines of credit have been opened, how many late payments you have made, and if any lines of credit are in default.

Debit Card– a form of payment similar to paying by cash, except safer. The funds are directly withdrawn from your checking account. Your bank may have fees if you spend more than you have in your account (overdraft).

Grace Period– this is the time after you make a purchase before interest is charged. It is usually a set day of each month when the statement period closes and the statement is made available to you.

Lender– the person or entity loaning you the money so you can purchase something