15 Jan

Getting Your Finances Ready for 2015 Part 1: Establishing Credit

get a rmlefcu credit cardIt’s the start of a new year, and everyone is filled with motivation to try and better themselves in someway. We all know it won’t last long, so seize this moment to make a change that matters: establishing and keeping good credit through the use of a credit card.

What exactly is credit, and why is good credit important?

Your credit, which is reflected in your credit score, is your financial history including credit accounts, account history, outstanding loans, paid off loans, and a history of your debt repayment. Lenders will review your credit score when deciding whether or not to give you a loan, or to decide the interest of the loan. How you’ve handled your bills in the past is the best indicator of how you will handle your bills in the future.

Establishing good credit early can be hugely beneficial for goals later in life: buying a car, buying a house, or getting a loan to start your own business. Establishing good credit is important because it allows you to pay less in the future for your loans. With bad credit, every purchase you finance will be considerably more expensive because your interest rates will be higher. Bad credit can also prevent you from being able to finance something in the first place, usually large purchases like a house or an apartment. It can even affect your chances at employment!

How do I establish credit?

We have a simple, three step program for you to start establishing credit.

Step One: Get a credit card. This can be a bit trickier than most people assume, especially considering the amount of credit card junk mail offers we all get every week. If you have no credit, credit card companies and banks are looking for other indicators that you are responsible with money. Residency bills, bank accounts, and utilities in your name are all indicators of stability and responsibility. Try applying for a credit card from your bank or credit union: it’s usually going to be your best chance of getting accepted for your first credit card. Learn about RMLEFCU credit cards here.

Step Two: Now that you have the credit card, use it! Don’t go crazy and get that 72-inch flat screen you’ve been eying but know you can’t afford. You still can’t afford it. Start small, and purchase the same items that you regularly do. Try to think of your credit card the same way you think of your debit card in the beginning: if you’re not sure that you have the money in your bank account for an item, than don’t make the purchase.

Step 3: Be patient. Rome wasn’t built in a day, and your credit score won’t be either. A few months of responsible credit use does not mean you’ll get a loan for a mansion. Read on to learn about how to grow your credit and keep your credit score high.

pay-bills-on time to establish great creditOkay, I have a credit card. Now what?

If there was only one piece of advice that we could offer here, it’s to never make a late payment! A late payment will wreck havoc on your credit score, and newsflash, the earlier you start making late payments, the worse effect it has on your credit. Establishing credit is all about creating a history of responsible decisions; nothing dents a solid credit score faster than a late payment.

As long as you’re paying on time every month, you might as well pay in full. It should be easy because you’re not purchasing anything you can’t afford, right? (If you are, see Step Two in establishing credit!). Paying the minimum from month to month does not directly affect your credit, however having a large amount of credit card debt sure does. If you have a large percentage of your line of credit unpaid, it’s a warning sign to lenders. Sure, there may be a time or two when unforeseen circumstances require a minimum (but definitely not late!) payment. Just don’t make it a habit: credit history is all about habit!

If you have more questions about establishing credit or applying for a credit card, your bank or credit union will be your best resource. As always, the staff at RMLEFCU would be happy to help!

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