Credit Basics

Establishing and Managing Credit

Credit is the ability to buy items today that you pay for over time.  You pay lenders (creditors) according to a payment schedule – usually with interest – in amounts you can afford.  Works for them.  Works for you.  The ability to manage credit responsibly translates into a credit score used by banks, insurance companies, service providers, and others to determine your credit worthiness.  Even employers will sometimes consider an applicant’s credit history in the hiring process.

So how do you establish credit?

The key to establishing credit is opening the type of account reported to a credit-reporting agency (“credit bureau”).  Generally, this includes credit cards, loans, and mortgages.  Start small.

• Open a retail store credit card
  
• Open a secured credit card
  
• Ask a parent to add you on their credit card as an authorized user
  
• Use a cosigner to open a loan

Also, consider the benefits of accounts not routinely reported to credit bureaus.  For example, a deposit account with a bank or credit union establishes a relationship that could be helpful down the road.  Even signing up with a major cell phone carrier for service can provide creditors a glimpse into your credit management habits.  
 

Maintaining Credit

Once you have established credit, maintaining it is easy by following these simple tips:

• Pay on time, all the time
  
• Keep credit card balances below the credit line amount
  
• Pay off credit card balances monthly, or at least the minimum amount due (more is better)
  
• Avoid impulse spending
  
• Avoid applying for credit unnecessarily – too many inquiries can be negative

Used responsibly, credit paves the way for future services, and easier less costly borrowing.