Start Building a Great Credit History

May 7th 2016

Many young people fail to consider the impact that a great credit rating can have on the rest of their lives. Most understand that it can impact their ability to buy a car or a house. Beyond that, however, people can be a bit fuzzy on the importance of good credit.

Good credit not only allows you to buy a car or a home, it also allows you to finance these purchases at a lower interest rate. A good credit rating can also impact your ability to get a job, a promotion and, in extreme cases, can even affect whether or not you receive government security clearance.

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Luckily, managing credit isn't difficult. It does require self-discipline and a bit of knowledge, but that is really all there is to it. This is one of the easier "housekeeping" tasks to master in your life, and it starts the day you apply for your first credit card.

Applying for a Credit Card

There are two main types of credit cards. The first is the standard Visa, MasterCard and Discover Cards that most people are familiar with due to their prominence. These cards can be used in place of cash in most locations in the US. The second type of credit card is store-specific cards, such as Sears, Macy's and Neiman Marcus. These cards can only be used to purchase products at their respective stores. American Express, the green card, is what is considered to be a charge card. These are not used much anymore. The customer uses the card in place of cash, then pays the balance of the card in full each month. American Express also has credit cards.

Applying for a credit card is simple enough. It's a straightforward form that asks for basic information, including you name, address and employment history. You will also submit your social security number. In a couple of states, if you are married, then you need to include information for your spouse as well. In most places, though, you can apply for a credit card in your own name without listing a spouse.

You do not want to apply for many cards at once. Most credit experts suggest that no more than three standard cards be applied for per year and no more than five cards total. While you certainly can be approved for far more than just five cards, the number of open accounts begins to make your credit file look shaky at that point. There is no such indicator on store cards.

Choosing a Credit Card

Selecting credit cards can be harder than it seems at first glance. Store cards are easy. If it's a store where you shop frequently, it can actually save you money; many stores give a discount or other perks to their cardholders. Even Discover Card and American Express are fairly simple. The difficulty comes with Visa and MasterCard. It seems like virtually every company has their own Visa or MasterCard. Some cards grant bonus points for use toward various perks, like frequent flyer miles. To choose the best card, you have to look at your most frequent purchases and what, if any, perks the cards offer.

After you look at perks and any bonus points, look at the interest rates.  This will be different on every single card. One great source for finding the best interest rates is Money magazine. Every month, they publish the companies that are offering the lowest interest rates. Choosing a card with an interest rate that's even 1% lower can save you thousands of dollars.

How to Use and Safeguard Your Credit

A good rule of thumb is that if you can't pay cash, don't buy on credit. Never allow petty purchases to sit on your account accruing interest. It's a good idea to have a card for smaller purchases that you pay off in full each month and a card for larger purchases, like a new washing machine. This way, you aren't accumulating interest on your Starbucks latte, but you're still able to purchase necessary big ticket items.

Pay attention to due dates. Most credit cards can be paid online, as well as by mail. Do whatever is necessary to ensure that the payment arrives and is also posted to your account by the due date. 

Watch the grace period on your credit cards. The grace period is the amount of time between the purchase date and the date the company starts charging you interest. You want to minimize your interest, and paying attention to this is a great way to do that.

Always pay more than the minimum due, even if it's only by $10. This pays down the principle much faster. 

Guarding your credit means that when you need to purchase a home, car or even get that top secret security clearance, you will be ready. It's not difficult or time-consuming, and it's an important step in your financial success plan.

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