While most future-minded college students do a good job of looking after their academic record, they ignore another kind of record that’s even more powerful: their credit record. Your credit record is your financial reputation. It counts big in this world.
If you want to rent an apartment, buy a house, get a phone hooked up, obtain a credit card, take out a loan, buy a blimp or start a business, you need a good credit record. A company that wants to check your credit can call other companies that have done money deals with you in the past, or they can get a report from a credit reporting bureau. Credit bureaus are private institutions that sell credit information to other businesses. In the U.S. there are many, many small bureaus and three big ones: Experian, Equifax and Trans Union. Creditors, landlords and employers pay these bureaus for reports on people they’re considering as customers, tenants or employees, to determine their financial character.
The credit bureaus get their information on you from credit-card companies and others who have issued you credit. For example, if you have a major credit card, the issuer sends the credit bureaus details about your account: when it was opened, the credit limit, the status of the account (current, defaulted, closed, etc.), current balance, average balance and payment history. If you’ve made on-time payments every month for the past year, your report shows this in a series of uninterrupted good marks. And if you’ve missed any payments, these show up as bad marks. At a glance, anyone looking at your report knows how reliable you are.
Your credit record also contains any legal judgements against you such as a bankruptcy or a lien on property. These judgements are part of the public record, so credit bureaus are allowed to include them in your report seven to 10 years, depending on the type of judgement.
Since the credit bureaus get their information from creditors and the public record, if you’ve never been issued credit and have had no judgements against you, it’s very likely that they have no file on you at all. Which means, if you want to establish a credit record, you’ve got to make the first move.
The simplest way to begin building a credit record is to apply for a credit card. Many banks seek out first-time card applicants among college students; you’ve probably received their mailings or seen their ads on bulletin boards. If you have more than one application to choose from, go for the card with the lowest (or no) annual fee and the longest grace period.
If you were intending to use the card to obtain cash advances or to pay for purchases in smaller monthly payments the interest rate would also be important. But that’s not what this card is for. Your intent isn’t borrowing, it’s establishing credit. And you’ll do that by making a steady series of purchases and paying every credit-card bill on time and in full, which means that you’ll never pay any interest. More on that in a bit.
The information you provide on your application is especially critical when you have no credit record: It’s all the creditor has to go on to determine your creditworthiness. Here’s what may be asked on the application:
Income: The longer you hold a job, the better you look. Don’t lie about your salary or how long you’ve worked at your current job; the credit-card issuer may call your boss to verify the numbers. If you have other sources of income be sure to list these too. Every little bit helps. If someone pays you in cash, make out an invoice, mark it Paid and get it signed. Make sure that the money you earn can be used to prove your ability to earn more of it.
Expenses: You may be asked to list some of your regular expenses such as rent and car insurance. If they don’t ask, don’t volunteer it; and if they do, list only what is asked for.
Assets: If asked, list the amount of money you have in savings and checking accounts (they may call to verify these too, so shoot straight). If you have money invested in mutual funds, CDs, stocks, bonds, gold, or pork belly futures, write it down. These things suggest that you know how to handle your money. You may wish to mention any toys or vehicles you own that are worth several hundred dollars or more: an expensive camera, motorcycle, car, helicopter.
Liabilities: If you have any debts such as auto or student or personal loans, you’ll be asked to list your monthly payment and the outstanding balance.
If your monthly expenses all but wipe out your income, the creditor will figure that you don’t have enough cushion to make monthly payments on a credit-card debt. If your liabilities (what you owe) greatly exceed your assets (what you own), they don’t want to help you dig your grave deeper. (Actually, they know that once you’re in the grave, you won’t leave enough behind to pay off the debt.) But if you have a healthy cash flow, little or no debt, and evidence of good money management habits, you’re their kind of customer.
If you’re not their kind of customer, they’ll send you a rejection letter. It’s no big deal; just apply for a card with someone else. But don’t send out a bunch of applications or apply for cards you think you have little chance of getting. Some card issuers submit the rejection information to the credit bureaus. You don’t want all those rejections listed in your new record.
Should you strike out in your attempts to get a major unsecured credit card, you might consider applying for a secured card. You deposit, let’s say, $500, into an account with the issuer, and get a credit card with a $500 credit limit. Sometimes the issuer will grant you more credit than you have on account, giving you, for example, $750 in credit for your $500 on deposit. Another way to get your first card is to apply at a department store. These cards are often easier to get. Be sure to pick a store that sells things you have use for — you’ll need to make regular purchases with that card to build your record.
Building a Reputation
As I mentioned, credit-card issuers send regular reports of your account activity to the credit bureaus. If you don’t use the card, they’ve got nothing to report. So it does no good to your record to merely get a credit card: You’ve got to use it. The goal here is to fill your credit record with good marks — an unbroken series of symbols indicating that every payment was made on time. If you’re diligent, you can do this without paying a penny in interest.
The key is to use your card at least once each month for a purchase you need to make anyway: gas or groceries, for example. If you have a department-store card, this is a bit tougher to do — you don’t want to spend money merely to establish credit. Just try to shop there at least once a month for a single item you need: socks this month, a T-shirt next month, and so on. And if you have no need, it’s OK to skip a month. But whatever you do, don’t be even a day late with a single payment: A good mark is best, but no mark at all is better than a bad one.
Remember that you need not actually borrow money — that is, carry over an unpaid balance from month to month — to establish good credit. Your credit report doesn’t specifically indicate whether you’re carrying a balance. It just shows whether you’ve made each payment “according to terms” — and paying your balance in full each month is in full accordance with those terms. Your purpose is to build a stellar payment history, not to dig yourself into debt.
Once you’ve established good credit through a consistent record of on-time payments, you’ll find it much easier to get additional credit. Maybe too easy. As your credit reputation grows, you might soon find yourself swimming in offers for cards. Toss them. Each application that’s submitted ends up as an entry on your record, either as a new account or as a rejection.
There’s another problem with carrying too many credit-card accounts: When it comes time to apply for something big such as a business or home loan, the creditor you apply to will add up all the credit limits shown on your report. If the total is too high, they’ll reject you as too great a risk. Though they want to know that they’re not the only ones who trust you, they also don’t want to stand in a long line to get their money back if you crash and burn in debt. Hold onto just one or two credit cards and keep your credit record uncluttered. This will also cut down on the junk-mail offers that inevitably come with each account — and the checks you must write to each account if you fall for those offers.
For the accounts you do maintain, make sure that you send every payment on time. It’s not the end of the world if you’re late once or twice, but it does get noticed by those who see your report, and it’s a broken promise to your creditor. If you know you’re going to be late on a payment, call the creditor and ask for an extension. Most credit-card issuers will grant you a few more days of grace if you ask, and you’ll prevent a bad mark from showing up in your record. This works a few times; overuse it and they’ll turn you down.
If you’re unable to pay a credit-card bill in full, send as much as you can afford, but no less than the minimum payment. As long as the money you send is equal to or greater than the minimum payment, and it’s received by the creditor on time, the payment will be recorded as “according to terms,” which puts another good mark in your record. That’s the good news.
The bad news is that you’re now paying interest on the unpaid balance. So if your balance is $100 and you make just the $10 minimum payment, you’re now paying interest on the $90 that’s left. So send in everything you can afford, then pay the whole thing off on the next payment (or before then — there’s no rule that says you can’t pay bills before they arrive). The minimum payment printed on your bill is ingeniously calculated to ensure that you pay the greatest interest for the longest time possible. In short: It’s a bad, bad thing for you. Don’t use it.
There’s even more bad news. If you carry over a balance into a new billing period, you’ll pay interest on any new charge from the day you make it: An unpaid balance erases the grace period. So if you can’t pay a bill in full, immediately stop using the card. Put it away until the balance is paid off.
There’s a lot more to learn about maintaining your good credit — and redeeming a bad reputation — than I can cover here. If you’d like to find out more on these topics, check out some of the Web sites listed in the sidebar.
The Automatic Door Opener
Both your academic record and your credit record determine which doors will be open to you in the future. But the former loses most of its power the moment you decide to end your academic career; the latter will either lock or unlock the doors in your path for the rest of your life. True, the marks in your record are removed when they’re several years old, but that’s a long time to wait to see a spotty past fade away. And it may take even longer to break the bad money habits that soiled your reputation.
It’s much easier to start things off right. Apply only for the credit you really need, and make every payment on time with no exception. When the time comes for you to buy a home or start a business, your record will precede you, the doors will open up ahead.
Copyright 2003 Todd Temple. All rights reserved. International copyright secured.