Dear Savvy Smithie: Establishing Credit

Vivian Li ’14, Susan Brunelle ‘AC

Dear Savvy Smithie,

I need to start establishing credit in my name. Do you have any suggestions on ways that I can establish or get credit?

It is important to start establishing credit before graduation since it will be important moving forward for starting your life after college. If you do not have any established credit, it will be difficult for a creditor to determine your payment history. Good credit history is important because a potential creditor will determine if you are a good risk for loans based on your credit standing. These are some simple ways to start establishing credit.

1.     Get a secured credit card. A secured credit card is just like a regular or unsecured card. The only difference is that you are required to put down a security deposit, usually from $300 to $500, to provide assurance that you will pay back your debt. Keep in mind that a secured credit card is different from a debit card. While a debit card does not report to the credit bureaus, a secured credit card does report payment history to the credit bureaus. Hence, how you use a secured credit card will affect your credit score.

2.     After a year, apply for an unsecured credit card. Twelve months of timely payments should be enough to show the credit card company that you can manage debt responsibly. You can ask to have your secured credit card changed to an unsecured credit card. If that happens, your security deposit will be returned to you and you might be given a higher credit limit.

3.     Only charge what you can afford to pay off in full. Building credit means showing your ability to pay back money you borrow. So, even if you open a secured credit card, you need to use it so that you can show good payment history. Keep the balance charged no higher than 50% of your credit limit.

4.     Pay your bills on time. One late payment can have an adverse effect n your credit score. Also, the creditor has the ability to raise your interest charged if you are late even one month.

5.     Place at least one household bill in your name. As some major providers report all payments, it is important that you pay your household bills (such as utility, phone service or internet) on time. If your provider does not report all payments, you may be able to ask them to provide a letter of reference if you have good standing. Though the letter may not increase your credit, it can be helpful to a potential creditor such as a landlord.

Building good credit takes patience but it will open more opportunities as you move forwards in your years after college.

Sources: Quizzle, Business Insider

 Dear Saavy Smithie is supported by the Center for Women & Financial Independence (WFI), which aims to enable students to manage their own financial wellbeing. Have questions about personal finance? Send them to wfi@smith.edu. WFI is located at Neilson Archway, next to Neilson Library.

 

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