Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5

Chapter 3: Credit

Having a positive credit report and score can provide many benefits. Not only are you more likely to be approved for credit in the future and receive a lower rate (which will come in handy in if you want to buy a house some day), but it may also be easier for you to rent an apartment, get good rates on your insurance, and perhaps even get a job (yes, some employers check your credit).

In order to have a good credit report and score, you need to have and use credit responsibly. Many people start with a credit card. (Even if you have student loans, having a credit card will still help you build good credit.) When deciding what credit card to apply for, note and compare the important features of each card, including the:

  • Annual percentage rate (APR): This is the interest that you are charged on any balance that you carry over, or do not pay off, each month. If you pay off your balance in full every month, the APR is not important, but it doesn’t hurt to look for a card with a low APR just in case. If the card comes with a teaser rate – a low or no interest rate for a temporary period of time – don’t forget to check what the interest rate will be once the teaser rate expires.
  • Credit limit: The credit limit is the maximum amount you can borrow at any given point in time. Having a higher credit limit is better for your credit score, but if you are worried you will overspend, it may be a good idea to look for a card with a lower limit.
  • Fees: It is standard for creditors to charge a fee for paying late or going over the credit limit. Some cards also charge an annual fee. You should avoid cards that charge an annual fee unless you are new to credit and that is all you can get (discussed more later).
  • Rewards: Rewards are perks, such as cash back or gift certificates, that come with using the card. Having perks is nice, but be careful – sometimes rewards cards charge higher interest and fees than credit cards that don’t come with rewards.

While getting a credit card is much easier than getting a mortgage or car loan, if you do not have a credit history, you may find it difficult to get approved for that first card. All hope is not lost, however. One possible option is a store card. You can only use it at the store associated with the card, but it is usually easier to get approval compared to a regular credit card. Another option is secured credit card, which requires you to put down a deposit. If you fail to make payments, the money you owe is deducted from the deposit. The credit limit on secured credit cards is usually low, and you will probably have to pay an annual fee, but many creditors are willing to convert a secured card to a regular card after a year or two of on-time payments. Lastly, you can have someone with a good credit history co-sign your credit application. You have to be extremely careful with this option, as the account history will appear on the co-signer’s credit report and the creditor can collect from him or her if you do not make the payments. If you mismanage the account, you could sour your relationship with the co-signer.

Once you have a credit card, use it wisely:

  • Stay out of debt. It doesn’t take long for a few purchases to add up to hundreds, even thousands, of dollars. Don’t charge more than you can afford to repay by the time the bill comes in.
  • Pay it off. If you do get into debt, commit yourself to getting debt free as soon as possible. Pay more than the minimum, and don’t charge more on the cards until your balance is at zero. Seek help from a reputable credit counseling agency if you are having difficulties managing the debt on your own.
  • Pay on time. If you miss a payment, your credit score can take a quick and hard hit. Furthermore, you may be charged a late payment fee.
  • Limit the number of cards you have. (2-4 is usually a good number.) The more open credit lines you have, the more you may be tempted to spend beyond your means. Also, applying for credit too often can hurt your credit score.
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