Building And Maintaining Good Credit

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Establishing Your Credit

So, how do you establish credit? Even more important, how do you establish and maintain “good” credit — credit that allows you to buy things you would otherwise have to save for a long time to afford: a vehicle, a home or college tuition?

The first step is by learning to manage your budget — and your existing debts — before borrowing for the first time, or borrowing more.

Track Your Money

Know Your Net Worth

To gain control of your finances, you need to know exactly where you stand. Start by calculating your net worth. Your net worth is simply your assets minus your liabilities.

Your assets are anything you own that has value, and your liabilities are exactly the opposite — anything that you owe. The Calculating Net Worth work sheet will give you a snapshot of your net worth:

How Much Are You Spending And Saving?

One way to determine exactly how much money flows in and out of your household is by tracking your expenses. For 30 days, keep a written record of every dollar you receive and every dollar you spend.

Use the Monthly Spending Record work sheet to track your expenses. And remember: Be truthful. You might be surprised by how much you are spending for incidentals such as snacks, toll road fees and tips.

Develop A Budget — And Stick To It

Remember to secure your future by saving before you borrow. Set aside a fixed amount each month — preferably 10 percent to 15 percent of your net income — for “emergencies” and retirement.

Finally, remember to budget for fun, but do not overdo it. Remember the cardinal rule: Do not spend more than you bring in.

Use Your Monthly Budget work sheet to help you establish a budget.

Do Your Homework

It is important to understand the types of credit available to you, and how to manage them. Here are just a few examples of borrowing options:

• Student Loans — Loans offered to students to help them finance their education. These loans may be issued by private banks or by the government. Government loans generally carry lower interest than private loans.
  
  
• Credit Cards — Cards issued by banks that allow consumers to purchase goods and delay payment. If the balance is not paid by the due date, the consumer pays interest on the unpaid balance.
  
  
• Line Of Credit — The pre-established amount of money a lender will extend to a borrower over a specific time period.
  
  
• Signature Loan — A loan that is not backed by the borrower’s possessions, which also are known as collateral. Signature loans are also called unsecured loans.
  
  
• Collateral Loan — A loan that is backed by the borrower’s possessions. The possessions are subject to seizure if the loan is not paid. For example, a vehicle loan is a collateral loan because the vehicle may be repossessed if payments are not made as promised.
  
  
• Co-Signed Loan — A loan that is signed by two or more parties, with both parties responsible for repayment. Co-signed loans allow people with low incomes or spotty credit histories to borrow money. If the primary borrower defaults, the co-signer becomes responsible for the debt.
  
  
• Mortgage — A loan offered for the purchase of a home or other real estate, with a specified interest rate and timeline for repayment — usually 15 or 30 years.

Establish Credit Relationships

Remember: Do not apply for too many credit cards or loans, because too much debt can damage your credit score. Three credit lines is a reasonable and practical limit.

• Choose a bank with no or low annual fees.
  
  
• Obtain a bank credit card or line of credit. Often your first credit card will have a very low limit, backed by your savings account. Use it carefully and make payments promptly. Doing so will establish your creditworthiness.
  
  
• If you cannot qualify for a bank credit card, apply for a credit account from a local store and use it wisely until you have established a payment record. Then apply for a bank card. If it is approved, stop using the store card and formally close the account.
  
  
• Finance the purchase of a vehicle.
  
  
• Rent an apartment or purchase a home.

When applying for credit, do not forget to read the fine print — pay attention to penalties for late payments and for early payoff of debt, for example. Once your credit has been approved:

• Make your payments on time and stay well beneath your credit limit.
  
  
• Continue to use your checking account correctly, avoiding overdrafts that could mar your credit history.
  
  
• Take advantage of online banking to monitor your savings account balance, checking account balance and credit card balance and payments.

Remember: Learning to budget wisely takes discipline and practice — and establishing and maintaining a good credit history does too.