Establishing Your Credit Score

Filed under: Lending, Personal Finance, Young Adults, Adults, Retirees

People that extend credit are looking for an indication of whether or not they'll get their money back. Credit scoring was developed just for that purpose. Through a mathematical formula your credit score takes into consideration how you've paid your bills, how much you owe, how long you have been paying, how much credit is available if you were to max-out all your credit cards tonight, etc. Your credit score is a pretty accurate prediction of how likely you are to pay your bills.

When you are young or have never had credit in your name, your credit score is going to be low. How you handle your money from month to month will build your credit history. Good financial choices will raise your credit score and poor choices will keep it low. Here are a few suggestions to get you on the road to a higher credit score and lower interest rates.

Open a savings and a checking account

These accounts will not appear on your credit report however, you will need a place to deposit your paychecks and a means to pay your bills. A cushion of savings will help you make payments if your hours are cut, you lose your job, or get sick and miss work. Most credit applications also ask for your savings and checking account numbers.

Apply for a credit card

Don't apply for the Visa Gold right out of the chute and get denied. Each time you apply for credit it shows up on your credit report. Choose one department store or gas card which is easier to get approved for than a major credit card. Choose the card of a business you spend money at each month anyway. A credit card is not supposed to make you spend more money but to offer you a different way to pay. Since the whole purpose of the card is to establish credit history, make sure before you apply that the card issuer reports account activity to the credit bureaus.

Charge purchases and pay them off each month on time

If you received a gas card, for instance, pay for one of your usual purchases each month with your credit card. Instead of blowing the cash you would've used on that purchase, set it aside to pay the credit card bill. If the bill is due on the 21st make sure they have your payment by the 21st. There may not be a late fee if you pay before the 30th but if the bill is due the 21st you need to pay it by the 21st.

After several months of responsible use of the card you may want to apply for an all purpose credit card like a Visa. While a Visa can be used in more places it will also give you more opportunities to get in trouble. Just remember, a $5,000 credit limit is not $5,000 in additional income. It is only a different way to spend the money you already have.

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