Credit Cards

Big credit card companies know you’re new to the “real” world and understanding finances. This makes you an easy target for marketing ploys, such as “0% interest for 12 months” or “earn double the sky miles.” Although these rewards are useful, don’t let yourself fall for the trap without doing proper research.

And if you’re not going to take advantage of a credit card offer, remember to shred the document so someone else can’t try to open credit in your name.

Myth: Credit cards are bad.

Credit cards are a very easy way to build your credit and learn financial responsibility. However, if used incorrectly, they can be extremely detrimental to your financial future. Credit cards are handy to have in case of emergencies (e.g., flat tires, tow truck fees, doctor visits, death in the family, etc.).

Credit cards are handy for traveling expenses. Hotels and rental car agencies put holds on your account in expectation of incidental costs. Having this hold placed on a debit card can freeze your funds for days. If there are no damages, the funds are returned to your card, but this process can take as long as several weeks. If you’re on a budget, such a hold can delay money transfers, block scheduled payments, and restrict available funds. In this case, having a credit card to bear the brunt of the hold is beneficial.

When you get a credit card, plan on paying the balance each month. Plan and save for big purchases so that you are not paying for the cost of the item and also paying interest into the future.

Myth: The best credit cards give you freebies.

Credit cards with the most benefits typically have higher annual fees and interest rates. After the promotional period, penalties for late payments, interest, and continuation of benefits may be expensive. Some credit cards offer airline reward miles, but remember that the airlines often have limited dates and times available for cashing in the rewards.

Once you fall into credit card debt, it can be a very long process to get out. Interest continues to accrue month after month on your card, and if you don’t pay it off quickly, you will end up paying a lot of money. Credit card debt damages your credit report and can keep you from being approved for loans, such as when purchasing a car, or getting utilities in your name.

Establishing Credit

When you’re first starting out, establishing credit is difficult. You need credit to get credit. So where do you begin? Initially, credit is established through bank accounts, employment history, residence history, and utilities.

Responsible banking

The first step to establishing good credit is good banking practices. Several delinquency notices and overdraft fees will negatively affect your credit score. Establishing a trusting relationship with your bank is helpful, especially when applying for a loan.

Employment history

Show creditors you are reliable and dependable. Spotty or no work history will lower your score and make it difficult, if not impossible, to secure credit. In addition, many employers conduct credit checks as part of their hiring practices. Bad credit can keep you from getting a job.

Residence history

Credit lenders look at where you have lived and if you rent or own. Having consistent residency shows creditors you are stable and established.

Utilities

Bills in your name, such as for cell phone, cable, or Internet service, and making timely monthly payments put you in good credit standing. Most of the time you will need to have credit before a company will allow you to open an account. Have a parent or relative with good credit cosign the account with you. But remember, if you miss the payments, you will negatively affect the credit of your co-signer.

Check Your Credit Report

The three major credit reporting agencies—Equifax, Experian, and TransUnion—are each required to give you one free credit report a year. Take advantage of this and check your credit report at least once a year. You can request them from www.annualcreditreport.com.