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Remember what it was like as a kid to have to sit across from a teacher, doctor or other authoritative figure as they reviewed your "file"? They would read for a while and then glance at you with a smug look, before continuing to read. It seemed to go on forever, as if they were perusing "War and Peace." Talk about awkward and intimidating. You had to sit there and wait, wondering what it was in your file that could keep them so totally absorbed. It was times like that when you couldn't wait to grow up.
Unfortunately, even as adults we have "files" kept on us, one of the most important of which lays bare the history of our financial dealings - the proverbial credit report. The good news is that we get to see the file and can actually influence what goes into it, ensuring that our credit report details a positive credit history. The key to making this happen is to get things started on the right track.
Before starting on the path to building a good credit history, it's probably a good idea to understand why doing so is important. Whether you are shopping for a new home or auto, searching for the best deals on insurance, or applying for your dream job, people will be assessing you to determine if you can be trusted. A big part of that decision nowadays is based on credit worthiness, which is largely determined by what's listed in your credit report and your overall credit score.
Given the level of scrutiny your credit report will be put to by potential lenders, employers and businesses alike, it is imperative that you develop good credit habits early on. Doing so ensures you will have a good credit rating, which will enhance your credit worthiness in the eyes of those judging you. This will in turn attract credit providers willing to extend the best deals on credit offers, generally at substantially lower interest rates than the average person will find available.
On the flip side, bad credit habits lead to a bad credit history, which in turn drives down your credit score. Things such as late payments, having an account assigned to a collection agency, judgments and bankruptcies, can all negatively impact your score. Ultimately, low credit scores tend to scare off most credit providers. Those who are still willing to extend credit tend to do so at a hefty rate or fee.
So, what can you do to proactively ensure that your credit history starts on the right track? Follow these six steps and you are sure to establish the type of credit file you won't mind people scrutinizing - a credit report that is the envy of most others:
1) Request a copy of your credit report from all three national reporting bureaus - Equifax, Experian and TransUnion. Don't worry if there aren't files as of yet; the next steps taken will ensure that all three bureaus will soon have a file on you. If there is information available, check it to make certain it is accurate. If not, contact the bureau reporting the incorrect information so that they can take action to correct your file.
2) Open a bank account; preferably both a savings and checking account. Be sure to handle the accounts responsibly and do not bounce checks. You might even consider taking out a small personal loan if the bank will allow you to, although with limited history, you will probably need a cosigner, such as a parent. Be absolutely certain to make all payments on time.
3) Open utilities accounts (electric, gas and phone services) in your name and pay the bills on time. If you move, be sure to close the accounts. You would be surprised how many people have left open an account for a roommate, only to unknowingly have their credit hurt due to late or non-payments.
4) Apply for a school loan if you are attending college and haven't already done so. Chances are your parents or guardians will be listed as the primary borrowers, but the loan will still be reflected in your credit report if the lender allows you to co-sign.
5) Apply for a credit card (unsecured, secured, pre-paid, co-signed), retail charge card or a gas card. It doesn't matter which type of card you are able to obtain at first. At this point you are simply trying to ensure the reporting bureaus set up files and report that you have taken out some form of credit. In a sense, this is like the starting gun in a race. Once you do get a card, use it sparingly and be sure to pay the bill on time. If you cannot pay the full amount due, make at least the minimum payment, but always try to pay more than the minimum. Not only will you pay the balance off much faster, but you'll also look more creditworthy in the eyes of lenders by doing so.
6) Most importantly, remember that if you fail to act responsibly as you first start to create a credit history, you will be doing the exact opposite of what you are trying to achieve, which is establishing a good credit history.
You've established a good credit history, but now you're wondering how to keep it that way over the long term. Follow these simply rules and you can't go wrong:
1) Pay you bills on time
2) Limit the number of credit cards you carry to between two and four
3) Limit the total number of credit accounts you have open - use credit sparingly
4) Pay at least the minimum due, but always try to pay more
5) Keep your debt-to-income ratio under 20 percent
6) Do not max out accounts - keep balances under 30 percent of available credit
7) Review your credit report regularly