Erik Hansen is a graduate student pursuing a Master of Public Policy and the “When I Was a Mustang…” columnist.
While you may think it’s too early to start worrying about your credit score, as buying your first house is probably still a ways off, there are a multitude of other institutions that are already sneaking a peek at your credit history.
Right now, the difference between a good and bad credit score can mean having to pay more for auto insurance or having to pay a higher rate on a used car loan. Some jobs you might apply to will even take a look at your credit history.
Whether it’s deserved or not, having a poor credit history can reflect negatively on your trustworthiness and character. If you already have a sketchy credit history — or no credit history at all — there’s no time like the present to work on eventually bringing your credit score up to 750 or 760 — the threshold for what most institutions consider excellent credit. Below are a few simple steps you can take now to start building up your credit score.
Take a look at your credit reports
If you haven’t already done so this year, or ever, go to annualcreditreport.com — don’t go to freecreditreport.com — and take a look at what each of the three credit reporting agencies have on file for you. Even if you don’t think you have a credit history, the three credit reporting agencies are already tracking your every move.
Dispute negative items — this can mean anything from the time you and your roommates decided to leave for the summer without paying your electric bill, sending the item to collections or a credit card payment more than 60 days late. If you have a legitimate reason for disputing the item, it is extremely easy to make the dispute online. While viewing your credit reports online, there will be a button to click that says “dispute this item” — click it and plead your case.
Ask a past creditor for forgiveness. If you already went wild with your first credit card on hookers and booze and had your credit card canceled, work to pay your debt back and then ask the credit granter for forgiveness. If you pay your debt back and write them a nice letter, there is a small chance the credit granter might remove the item from your credit history. In your letter, it might also help to add references to kittens and stopping nuclear proliferation. Getting that bank-canceled credit card off your credit reports is much better than having it sit there for the next seven years, mocking you.
Credit cards
Get a credit card. Credit cards aren’t the devil, idiots with no self-control are. Credit cards allow you to spend the credit granter’s money. Disputing an overcharge or fraudulent charge is much easier if you used your credit card, as opposed to your debit card. Credit cards also provide warranties on certain items bought. They also do a lot of other amazing stuff like cure lupus and fight terrorism. If you don’t already have one, get one. If you are just starting out and can only get low line of credit, get a basic card with no annual fee. If you can get a higher line of credit, consider getting one that has a low annual fee ($45 to $65) with rewards, like a Southwest Airlines Visa.
Also, if you have to choose one card, make sure it is a card that reports your debt limit. For example, a credit card issued by American Express typically won’t report your credit limit to the credit reporting agencies, meaning it looks like you are maxing out your card each month.
Pay down your credit cards. If you already have a credit card (or two or three), pay them down. Not much else to say here. No brainer. Do it … do it.
Now that you have your new credit card, or have paid down your existing cards, only use about 10 to 25 percent of your credit limit, then pay the card(s) off each month. Not only does this protect you from having to pay interest — and shows that you are responsible — but it also looks better on your credit report. By keeping your average balance well below your revolving credit line, it looks like you aren’t spending like a fool.
Keep your old credit card accounts active. If you have already acted the fool and are using — and maxing out — five credit cards, don’t go about canceling all of them just because my column has brought about some epiphany. Sure you could cut up three or four of them if you don’t trust yourself to not use them, but if they are still in good standing, just focus on paying them off. Closing the credit card accounts will negatively affect your credit score by lowering your debt-to-credit ratio. You’ve already screwed yourself once — don’t go about screwing yourself again. Choose one or two credit cards to use and stick to them, while leaving your other seven card accounts open, but idle. Again, if you have to choose one or two credit cards to use, make sure they are cards that report your credit limit.
Get added to your parent’s credit card. There are all kinds of schemes out there to raise your credit score, but this one is probably the easiest. By having your parents, grandparents or a trusted person who is responsible and always pays their credit cards on time add you as a user to their accounts, you can significantly boost your credit score, especially if they add you to old accounts with large lines of credit. Even if they don’t trust you, they don’t have to — and probably shouldn’t — give you a credit card linked to their account. All you have to do is trust that they are going to pay their bills on time.
Installment loans
Installment loans are loans you pay off over time to make a big purchase. They “diversify” your credit portfolio and make you look like you are mature and can handle buying things you can’t pay for upfront, even though you are likely foolishly paying interest. It’s said that installment loans look better on your credit report than credit cards, especially if you’re paying the loans off on time.
One plus to all those student loans you have taken out are that they will probably be your biggest installment loan until you buy a house. By making your monthly payments on time when you graduate, you are showing creditors that you are responsible. You can look even more responsible by making small monthly payments now. While there is a chance student loans could hurt you in terms of your total debt load, there’s no crying over spilled milk.
When it comes to car loans, see above. Car loans are installment loans as well. Pay off your used Toyota Corolla, on time, and you’re golden.
Credit monitoring service
Credit monitoring services are a good way of protecting yourself from someone opening an account in your name and ruining your credit. Show those thieves who’s the boss by getting a credit monitoring service. Don’t pay for it, though. A lot of insurance agencies, banks and even AAA offer credit monitoring if you are a customer of theirs. The credit monitoring service offered will probably be a basic monitoring service and will email you a monthly status update noting if there were any changes to your credit, such as a new credit card or loan.
If you have actually made it this far into the column, you are smart and show promise — you care about your future! By also exercising self-control over the long haul, you are well on your way to securing a low-interest (fixed!) home loan and a Platinum AmEx.