by Dave Kutcher
Last week we talked about the importance of teaching children good financial management habits and some basics that will serve them well as they begin their own journey toward financial independence. One of the components of managing finances over time will be the use of debt (mortgages, car loans, retail credit cards, etc.).
While we are not encouraging the use of debt at an early stage to fund a beginner’s financial life, the ultimate use of debt is inevitable and getting started with the right foot forward can make a huge difference over time.
Establishing credit as one enters adulthood is a crucial step in building a financial foundation.
Understand Credit: Before you start building credit, it’s important to understand what it entails. Credit is essentially your reputation as a borrower, and it affects your ability to get loans, credit cards, and potentially even apartments or jobs. The better your credit score, the more favorable the terms of any credit extended to you will be, typically expressed by a lower interest charge.
To establish a credit score, which is the measuring stick lenders use to determine your creditworthiness, one needs to have credit history. Lenders are looking historically at how well you manage your credit in terms of the total amount you owe, how timely your payment obligations have been and if you have satisfied all the terms of those obligations.
So, how does one get started
A. Check Your Credit Report now: Even if you don’t have an established credit history, it’s good to check if there are any errors or existing records in your name. There are a few major credit bureaus, all of which will allow you to set up an account for monitoring and managing your credit report. The three main credit bureaus are Experian, Equifax and TransUnion.
B. Apply for a Secured Credit Card: This is a great option for new credit users. A secured card requires a refundable deposit that acts as your credit limit. You’ll use it like a regular credit card, and your payments are reported to credit bureaus, helping you build credit.
C. Become an Authorized User: Ask a family member or close friend with a good credit history to add you as an authorized user on their credit card. You don’t have to use the card, but their payment history will help improve your credit score.
D. Open a Credit-Building Loan: Some financial institutions offer loans meant for building credit. You’ll borrow a small amount of money, deposit it in a savings account, and make monthly payments until it’s paid off.
E. Use Retail Store Credit Cards: Some retail stores offer credit cards with easier approval processes. Make sure to pay off the balance each month to avoid high-interest charges.
F. Pay Bills on Time: Timeliness is crucial in establishing good credit. Make sure to pay all your bills, including utilities and phone bills, on time.
G. Monitor Credit Utilization: Keep your credit card balances low. Ideally, you should not use more than 30% of your credit limit.
H. Keep Older Accounts Open: Once you start building credit, keep your accounts open. The length of your credit history impacts your credit score.
I. Consider Student Loans: If you’re a student, responsibly managing student loans can also help build your credit.
Building credit takes time and responsibility, but starting with these steps will set you on a solid path to a good credit score.
My name is David A. Kutcher, a retired Marine Corp Captain. My business partner in the lower 48 is Richard C. Scott, CLU, LUTCF. For nearly 40 years we have been helping folks with their personal retirement decisions. You can catch us on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio and on Tuesday mornings, KFQD News Talk Radio AM 750 and FM 103.7. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577; (907) 795-7452.
