Establishing Good Credit
We all begin our financial lives with a credit rating of 0. As we move into the adult world, we must begin building a credit history so that we will be able to function financially. Building a solid credit rating isn't just about being able to get credit cards, car loans or mortgages. Even being able to rent an apartment or get utilities in your name is often dependent upon having a good credit rating. Although these financial transactions are generally not thought of as loans, landlords and utility companies are taking a chance that you might not follow through and fulfill the terms of your lease or pay for your gas and electricity on time, so they want to have a sense of whether you are a good risk.
Bad credit is more damaging than a lot of people realize. Not only will you find it difficult to get loans and have to pay higher interest when you do, but you may also find it difficult to rent an apartment or get one's utilities turned on without having to pay hefty deposits. A bad credit rating can even have an adverse effect on your ability to get a good job, especially one that involves handling money or other significant trust. Employers may be concerned that a person who has trouble handling money will be more tempted to embezzle money from the company or otherwise be dishonest.
Some people's credit records are damaged through no fault of their own, particularly when they are the victim of an identity thief. If the crime is not caught quickly, an identity thief can open large numbers of accounts in your name, run up huge bills, and then leave you stuck dealing with angry creditors. Even after it has been proven that the accounts were opened fraudulently and you should not be responsible for the loans, the black marks of delinquency could remain on your credit report for as many as ten years. Although it is not your fault, creditors may not be willing to give you the benefit of the doubt and will turn you down or make you pay much higher interest rates than your own repayment habits should have gotten you.
One of the most important elements of building a good credit history is dependably paying your bills. If you always pay your bills on time, your credit rating will go up, while late or partial payments will cause your credit rating to go down. Of course getting that first bill in your name can be difficult. Some parents put one of their utility bills in an adult child's name while the child is in college, so that their regular payments help build the child's credit history. For people who don't have such an angle, it may be necessary to explore other opportunities for building a history of paying bills reliably. One way is to obtain a store credit card, that is one that is only good at a particular store. These generally have a small credit line, perhaps two or three hundred dollars. Make a few small purchases and pay them promptly, and you will be well on your way to building a good credit score.
Another factor that helps to build your credit record is stability. If you keep the same job for at least two years and have a checking or savings account with a good bank for the same time, creditors will look favorably on you. Creditors often wonder if a job-hopper has problems holding onto jobs and might soon wind up completely unemployed, even unemployable. Living at the same address for several years also helps show that you are a stable individual who is not likely to cut and run on an obligation. Once you do get a credit card or other revolving line of credit, keeping the same one open for years will stand you in good stead. Having a record of closing revolving lines of credit only to open others is another major red flag that lowers your credit rating.
Your credit rating and credit history are an important part of your financial life. By working hard to build a good credit history and a solid credit rating, you put yourself on a firm foundation that will help you be able to acquire a car, a house, and other important things when you are ready to, instead of having to struggle to afford them.
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