Building Credit

In this topic, we cover:

• The many undeniable benefits of a solid credit history.
• How to build your credit as quickly as possible.
• What to avoid when canceling a credit card.

A good credit history makes it possible to get credit, especially for major purchases like a home or car, and it keeps the cost of all borrowing to a minimum. For example, having to pay just one extra percentage point on an average home mortgage because of bad credit could cost $100,000 or more over the course of the loan. A bad credit score may also make it expensive or impossible to get some education loans, potentially making it difficult to complete your degree or go to graduate school.

To build and maintain good credit, consider these tips:

• Use your bank account responsibly - bounced checks could make it difficult to open other accounts in the future.
• If you have services in your name such as telephone, cable, gas or electric, make sure you pay your bills in full and on time.
• Consider one credit card. Having numerous credit cards will not necessarily help your credit score and may increase your risk of financial problems. If you do have more than one or two cards, consider paying the extra cards off and stop using them.
• Always make payments for loans and credit accounts by the due date each month. Even being one day late may increase your interest rate and may result in a late fee ($35 on average). If a payment is more than 30 days late, your credit report may be negatively impacted for up to seven years.
• If you have an emergency and cannot pay your bills, contact your creditors. Before you call, have a clear summary of why you can't pay and what you would like the creditor to do to help. For example, if you can't afford a $100 minimum payment, maybe you can afford a $40 minimum payment.
• Review your credit report periodically for accuracy. Knowing what's on your credit report will give you a chance to dispute any information you feel is inaccurate.

If you've been denied credit based on information in your credit report, the lender is required under the Fair Credit Reporting Act to provide you with the name of the credit reporting agency and tell you that you may obtain a free copy of your credit report at your request. Otherwise, you can use the AnnualCreditReport.com website to review your report.

Cancelling Credit Cards

When reducing your number of credit cards, it's tempting to officially cancel the account. But doing so could potentially lower your credit score. That's because your credit score is tied to both the length of your active credit history and to the amount of your total available credit that is used. The best way to "get rid" of a card is to pay off any outstanding balance and simply stop using it.