Why credit matters for you
When you use a credit card, it creates a “debt” that you’ll pay to the credit card company in the near future (your credit card bill). So what’s a credit score? It’s a rating you get based on how timely and full your credit card payments have been in the past. A high score indicates to future lenders that you are likely to pay back your debts, thus making it less risky for them to offer you a loan. The opposite is true if you have poor credit. The interest rates you’ll get on future loans will be lower, the higher your credit score is (the less risk the lender takes). While this may not seem like one of those “who cares, I’m just a student” thing today, it will be important sooner than you might think.
Imagine in 5 years you want to purchase a house by taking out a 30-year, $300,000 fixed mortgage. If you have bad credit at the time and your credit rating is 560 (below average), your interest rate would be 9.85%, according to myfico.com. Over that 30 year period, you’ll pay $635,828.09 in just interest, according to the mortgage calculator at bankrate.com. Now supposed instead, you made wise decisions today and built up good credit over the next 5 years. At the time you take out the mortgage, your credit rating at around 760 (good), would yield an interest rate of 6.38%, or about 3.5% lower. Only 3.5% - no big deal, right? Actually, your total interest payment over 30 years would now be $374,415.35, a whopping $261,412.74 less than if you had bad credit. Feel free to bankrate.com and play with the calculator to explore other scenarios.
Good credit will help you save money whether you’re buying a house, or a car, or starting a business, or need to take out a loan for anything. The good news is that good credit is not that hard to build. The bad news is that bad credit is very hard to rebuild. It’s key to get it right from the start, to save yourself time, hassle and money later on. In order to build credit, you need a credit card, so check out our Student Credit Cards section first if you don’t have one, though you may find it helpful to read the rest of this article.
5 keys to building good credit:
- Always pay your credit card bills on time AND in full. This can be set up online through “Autopay,” which is offered as an option for online credit card management. Autopay let’s you select how much to pay at the deadline every month. Set the amount to “full statement balance” to avoid finance charges.
- Don’t max your credit card! Try to use no more than 1/2 of the limit every month (MSN money suggests using up to 30% for optimal credit rating building).
- Don’t EVER go over the credit limit. Some companies will let you go over by a little bit as a courtesy, but this will kill your credit score. If you try to follow #2, this shouldn’t be a problem
- It’s better to get additional cards than to max one, but no more than 2 or 3. Too many credit cards is not efficient to manage or build credit with. Don’t fall for the sign-up bonuses some cards offer.
- Cancel credit cards you aren’t using - inactive accounts are not good for your credit rating.
There are no silver bullets to building good credit, and it doesn’t happen over night. Ultimately, by paying your credit card bills fully and always on time, you should be able to build good credit over time. It’s important not to start doing so early - the sooner after you turn 18, the better.
If you are curious about your credit score, you can get a free credit report from several sources. It will take a few minutes to fill out the form accurately so that your identity can be verified. This free report comes with a 30-day free trial to a subscription credit monitoring program. Be sure to cancel within the 30-day period to avoid future charges.
Another free credit score service requires no Social Security number, and their form is much shorter to fill out (13 fields). However, it only gives you a 7-day free trial, during which you would want to cance to avoid charges. If you do it get your report and cancel immediately, it shouldn’t cost you a penny- just a form to fill out and a call to cancel the monitoring, and you’ll get a free report out of it.