Establishing Credit

I got an email from an undergraduate student who is interested in building her credit, but has no experience with credit cards. She wanted to know if there is a bank or credit company that is more trustworthy and less predatory than most, since she’s heard a lot about how awful credit cards can be. I decided to answer her question here since I’m sure she is not the only one wondering about this.

Feel free to send me questions, I’ll be happy to answer them here, and I’ll keep you anonymous, if that’s what you prefer! My email is sarah(dot)morehead(at)maine(dot)edu.

To answer the question about credit cards:
1) It’s all about interest rates.
When you open a credit account, you need to make sure that you are choosing a company with a long-term interest rate that is low. “Teaser” rates are the limited-time 0% APR offers that you get in the mail that are meant to entice you into opening an account with them, but after 6 months, the rate defaults to 14% automatically or some nonsense like that.

There are three critical things to think about when opening a credit account:
1) The standard interest rates on purchases, cash withdrawals, balance transfers, and the DEFAULT rate.

Purchases – what is the standard rate (NOT the teaser rate) for purchases on the card?
Cash Withdrawals – If you need emergency cash, and you use the card to get it, what interest rate will you pay on that amount? (Normally, cards charge higher rates for cash withrawals than for purchases).
Balance Transfers – Sometimes, people open new accounts in order to transfer the balance from a card with a high interest rate to one with a lower one. Credit companies usually charge a separate rate for this kind of thing. Make sure you know the interest rate for balance transfers, specifically.

Default – If you miss a payment, the rate you are charged will automatically revert to the default rate (usually forever on all purchases from that point forward). KNOW THIS RATE!  If you have a hard month, or you forget a payment, you don’t want to be stuck paying 29.99% on your balance and all future purchases from then on!

2) Annual fees!
Paying $60 a year for a card is not necessary. Look for a low (or zero) annual fee.

You can compare rates and fees for different cards HERE

3) Use credit cards for convenience, NOT for borrowing.
What does that mean? If you borrow money to buy things, you will pay more than they are worth, and you end up poorer in the end. Yes, you need to build a credit history, but you don’t need to shoot your financial self in the foot to do it.

Set up an account, and pay your normal expenses with the card. Then, pay the card off from your bank account. Pay your phone bill, your electric bill, your rent, whatever. Then have the card paid off from your checking account. I suggest having one or two bills automatically tied to the card. You can set this up online. It’s an easy process, and once you set it up, you can put that credit card in a drawer and forget about it. Every month, your phone bill (for instance) will be charged to the card. A few weeks later, your bank account is charged for the balance. Everybody gets paid on time, and YOU build a good credit history without paying extra for junk you don’t need in the first place.

You can learn more about credit cards, investments,and the differences between good credit, bad credit, good debt and bad debt in my BOOK.


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