Follow These Tips to Better Credit
04/10/2012 6:15 am EST
Focus: MONEY MANAGEMENT
How can young investors build good credit quickly? Some of the tips shared here by Odysseas Papadimitriou, founder and CEO of online credit-card marketplace CardHub.com, may surprise you.
For some things in life, there are just no shortcuts, and unfortunately, your credit score is one of them. By that, I mean it’s going to take some time to establish a solid credit history no matter what you do. (I guess they don’t call it credit history for nothing).
However, not only is building credit worth it—your loan rates, insurance premiums, and ability to finance a new venture all depend on it to varying degrees—but it’s also not as tough or time-consuming as one might think.
There are a few steps young investors can take to make the process as quick and painless as possible, and it all starts with getting a credit card in your own name. While you might just chalk this up as biased advice, given that it comes from a guy who runs a credit card comparison Web site, the truth is that credit cards are the most efficient credit-building tools available.
Why? They relay information to Experian, Equifax, and TransUnion—the nation’s three major credit bureaus—on a monthly basis, thereby filling your credit files with information and giving you the opportunity to systematically improve your credit standing.
The trick is to make sure this information is positive, as all press is certainly not good press when it comes to your credit score. There are two ways to do this:
Effectively Managing Spending and Payments
Your credit score depends on myriad factors, but those most important to young investors that need to build or rebuild their credit history are credit utilization and payment history.
By using only a portion of the credit available to you, paying your balance in full, and doing so on time every single month, you’ll ensure that the information being funneled into your credit reports is positive and that your account is classified as being in good standing. Missing a payment or spending up to your credit limit will only serve as roadblocks to your credit building efforts.
Now, I realize that it might be difficult to avoid using most or all of your available credit, given that newcomers’ credit lines are generally fairly low. The trick is to either open a secured card and add to its deposit over time so that you attain a high credit line (the closer to $5,000 the better), or less ideally to get in the habit of making more than one payment per month.
Forgoing Card Use
Interestingly enough, you don’t have to actually use a credit card to reap credit score benefits from one. If you simply open a card, pay any membership fees it may have, and lock it in a drawer, you’ll still be reported on a monthly basis as having an open card in good standing with 0% credit utilization.
The credit score gains provided by this strategy won’t be as pronounced as they would be if you were making purchases, because you won’t be displaying an ability to pay back what you owe on time, but it will certainly be more beneficial than not having a line of credit or loan relaying positive information to your credit reports on a monthly basis.
OK, that’s all well and good, but you can’t implement this strategy without knowing what credit card to get, right? Besides, doesn’t the new credit card law (the CARD Act) prevent people under the age of 21 from getting credit cards?
Addressing the latter question first, it’s merely a common myth that the CARD Act precludes people who aren’t of legal drinking age from getting credit cards. Rather, they must simply have a co-signer or indicate that they have the independent income or assets (yes, the balances in your investment accounts count) necessary to make monthly minimum payments.
With that out of the way, we can move on to the best types of credit cards for young investors seeking to build credit. In general, you want a credit card with the lowest fees possible so that you can essentially build credit for free. This should be a priority ahead of any rewards or low interest rates, especially since those won’t be too lucrative until your credit score is above average.
With that being said, the basic options potentially at your disposal are:
- Student credit cards: While you’ll only be able to open a student credit card if you’re actually enrolled, they’re great in the sense that they generally do not charge annual fees yet tend to have decent rewards/rates.
- Secured credit cards: As alluded to above, a secured credit card allows you to extend your own credit line by adding to your refundable security deposit. This is potentially very powerful since the more available credit you have, the better it is for your credit score. You can also get a secured card regardless of how limited or damaged your credit standing is, as long as you have at least $200 for an initial deposit.
- Unsecured credit cards for limited credit: If you’re not still in school and do not want to sacrifice liquidity, then credit cards for newcomers are your best bet. The fees you’ll be responsible for and the rates and rewards you get depend on the exact length and breadth of your credit history, as well as your income level.
Before doing any of this, however, make sure to get the free copies of your major credit reports—to which you are entitled every 12 months from annualcreditreport.com—and check them for inaccuracies. You don’t want to spend time trying to improve damaged credit that is based on flawed information, after all.
Ultimately, you should start seeing the fruits of your credit score labor in about a year. One of the best indicators of credit score progress is actually the types of card offers you get in the mail. For example, if you’re receiving offers for credit cards that require good credit for approval, you’ll know your score has improved significantly.
Read more from Odysseas Papadimitriou at CardHub.com.