How to Build a Good Credit History

My second article at the Penny Thots site, 6 Key Steps to Building a Good Credit History, went live last week and I thought I'd share here, as well. The steps I list are:

1. Get a Bank Account
2. Get a Steady Job
3. Get Some Credit
4. Make All Your Payments on Time
5. Keep Your Credit Card Balances Low
6. Monitor Your Credit

Under the third step, Get Some Credit, I suggest three ways to do so:

• Get a Credit Card on Your Own
• Get Added to a Credit Card Account
• Get a Co-signer

Now, for my readers here, I'd like to clarify. I am NOT suggesting that anyone co-sign any loan - EVER. I don't care who it is or what it's for. NEVER CO-SIGN.

And I'd also recommend against adding anybody to an existing credit card account, except MAYBE under extremely limited and tightly controlled circumstances.

So why did I add those things to my article at Penny Thots? Simply because those are ways to build a good credit history, which is the subject of the article and I want to be thorough. I guess now I need to work on an article or two warning against co-signing and adding someone to your credit card account.

Debit or Credit - Which Card Should You Use?

Debit and credit cards are both convenient ways to pay for things without carrying cash. The beauty of using a debit card is that you are spending your own money in real time rather than borrowing it from your credit card company at what is most likely an exorbitant interest rate. I rarely use my debit card, however, except to withdraw money from my bank. I also NEVER pay interest. Let me explain.

I use my VISA credit card to pay for most everything that I can, including our car and home insurance, vehicle license renewals, etc. I then pay the balance IN FULL and on time each month, avoiding interest and late fees. My account has no annual fee and even earns points based on the amount spent, so each year I actually get a little back. But even if I got nothing, I’d still use my credit rather than my debit for one simple reason:

Fraudulent Charges

That’s right – fraudulent charges. I have two family members who recently dealt with fraudulent charges on their debit cards. Although unrelated, at different banks and months apart, both had charges of several hundred dollars originating in the UK hit their bank accounts. In both cases, the charges were obviously fraud but still took quite a bit of time and effort to resolve. We’re talking several phone calls, personal trips to the bank and paperwork. In the meantime, they were out the money – not a good thing if you have bills to pay.

In contrast, I noticed fraudulent charges on my VISA credit card account a while back. A simple phone call resolved the problem – the charges were immediately reversed and I was out nothing, not even for a minute. I also had the option of taking care of the problem online. I did have to wait for my new card to arrive (and I had my old number memorized – dang!), but that was the only inconvenience.

Should YOU Use Credit Instead of Debit?

So is using a credit instead of a debit card right for everyone? Only if you use your credit card like you would your debit card and spend only what you can pay in full each month. If you don’t have the self-discipline to do so, I guess you'd better stick with the debit card.

How to Keep Your Unused Credit Cards

Do you have credit cards that you never use? On the one hand, this is good – it means you’re not racking up debt. On the other hand, a significant portion of your credit score is based on how much credit you have available in comparison to how much you’re using. So if you have an unused credit card, the available credit on that account is helping you. If the issuer cancels the unused card, your credit score will suffer.

Does This Apply to Me?
But wait a minute – I have no credit card debt as I use my cards as a convenience only and pay each in full each month. If you're like me, does having an unused credit card cancelled really matter? Actually, it could. Remember – the higher the amount of unused credit you have the better your credit score.

I’ve actually been worrying about this periodically as I have a VISA card that hasn’t been used in many years. It’s through a credit union so I don’t know that I’m in danger of being cancelled but the credit limit on that card is close to one-third of my available credit. Should the card be cancelled, that’s a big hit on my credit-to-debt ratio!

A Simple Solution
Suze Orman addressed this very issue in the November Costco Connection. A gal wrote in about receiving notification that one of her credit cards would be cancelled at the end of the year due to lack of use. Suze’s solution? Contact the card issuer and ask if they’ll keep the card active if it gets used once or twice a month. If so, pay one or two recurring expenses with the card such as the cable bill.

So why don’t I use my credit union issued card currently? Because years ago, every time I got the bill it looked like junk mail and I was afraid I’d toss it accidentally. So I just quit using the card. Fast forward to the present – I’m totally into paperless billing and don't get bills in the mail anymore. I guess it’s time to rethink my credit card usage and maybe use that card for some recurring expense as Suze recommends.