WELCOME 2: TWENTITY.COM ~ The Home for Twentysomethings

Have You Ever...- 2-28-07

Thought About What to Do with My Credit? Part I

By ChaChanna Simpson

At some point, all twentysomethings have been tempted by credit cards, especially those who are or have been on college campuses. If you have gone to an amusement park, street fair, opened your mailbox or looked on a website, you have seen an advertisement for a credit card. There is no way to escape them. Everywhere you turn, some company is offering a free something in exchange for your business. I’m not trying to imply that credit cards are a bad thing but if you don’t understand credit it can hurt you in your financial future.

Let’s start with the basics: What is credit?

Credit allows you to buy something now, even though you don’t have the money, and pay for it later in monthly installments. And here is something I didn’t know: there are two types of credit: open-end and closed-end.

Open-end credit has no specific time period for you to pay the money back. Credit cards, gas company cards and department store cards are examples of open-end credit. There is only a minimum payment for you to make each month. And although there is a maximum amount of credit you can use (credit line), as long as you don’t go over your credit limit, you can use your remaining credit to purchase other items.

Closed-end credit is for a specific purpose and has a limit. For example, say you bought a computer and had to take out a loan from a financial company. You would have a schedule of monthly payments and an end pay date (the date the balance will be paid). Other examples of closed-end credit are mortgages and automobile loans. And even though you bought the product, until the creditor is paid in full, they legally own it.

Keep in mind that no matter which type of credit you get, open-end or closed-end, you will have to pay monthly interest fees on the money you owe.

How do you establish good credit?

You have to have credit. If you don’t, it will be difficult for you to get a car loan or any other type of loan because you have no credit history for the creditor to verify if you are a good credit risk. I know it seems stupid: if you don’t have credit you can’t get it but you can’t get credit because you’ve never had it. What the heck are you supposed to do?

Apply for credit or loans at your local bank or go and get a department store or gas card. Make sure to ask if they report credit activity to a credit bureau. (We’ll discuss this in-depth later.) If they don’t then don’t bother because the card wouldn’t serve you any purpose. You want to be able to display to the creditors you can be trusted to pay your bills on time.

If you can’t get some type of credit card on your own, then consider getting someone to co-sign with you. Realize that by co-signing, the other person is agreeing to pay if you do not. Think about it, you could not only be screwing up your own credit, if you don’t pay, but theirs as well.

Once you get a credit card company to trust you, continue to earn that trust. All you have to do is pay attention to when your bills are due and pay them on time. I’m not saying you have to pay your credit cards in full as soon as you get the bill (that would be ideal), but if you can’t pay the full amount at least pay the minimum amount on time. The following are tips on keeping your credit clean:

Do your best not to go over your credit limit, even though most credit card companies will allow you to go over the limit so they can charge you an over-the-limit fee.
Cancel credit cards you’re not using. For some reason, people seem to think that the more credit cards you have, whether you use them or not, the better. Creditors see all that available credit you already have as potential for you to be in debt. So get rid of them.
Don’t apply for a bunch of credit cards because you want to see which one will give you a shot. Every time you apply for any type of credit or loan, it is documented on your credit report and counted against your score. A lot of inquiries on your report will send a signal to the creditor that you are a risky customer.
If you don’t have a checking account, get one. You really have no creditability to creditors if you don’t even have a banking account. And when you get an account, it is most important not to overdraft on your account. Not only is it expensive but it shows creditors that you can’t even handle your own money, much less the money you borrow from them.

I’m going to let this part marinate in your brain for a bit. Part II we’ll discuss the different types of credit.

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