Why It's Important to Build Credit

Building a healthy credit history is one of the best investments you can make in your future. Creating a track record that shows potential lenders that you can be depended upon to pay back what you owe and pay your bills responsibly helps you tremendously when you need to borrow money for a car or to buy a home. If you start out on the right foot when you're young, you will be in much better financial shape when you reach the age when most people buy homes, get married, and start families. But even if you have no intention of doing those things, building a solid credit history is to your benefit.

Opening a Bank Account

Step one of building a good credit history is opening a bank account. A simple checking or savings account with a debit card shows that you're serious about handling your money. Avoid making overdrafts and deposit money regularly (even if it's only a small amount), and you show your bank that you can be trusted. Often, smaller local banks give you the best account terms by not charging you monthly checking account fees and by requiring smaller minimum balances. If you consistently keep your balance above any required minimum, you gradually build a good history with your bank.

Get a Job and Credit Card

Getting a job and having paychecks directly deposited into your bank account (if possible) is a great habit to get into while you're young. After you've been working for a few months, consider applying for one of the following:

• A secured credit card
• A store credit card
• A traditional credit card with a low credit limit

You may have to start with a secured credit card, which is a credit card backed by a savings account. Some secured cards have great terms, while others have terrible terms that can harm your credit just when you need to build credit. Always compare several secured credit cards before choosing. Store cards are generally easy to get, but they carry very high interest rates, so you should only use them for small purchases and pay your balance in full every month.

Set Up a Household and Pay your Bills

When you get your first apartment or rent a house, you have to put down deposits to get electricity and gas hooked up. Paying your rent on time and paying all household bills on time is very important in managing money and building credit history.

Check Credit Reports Every Year

Even if you've only started to build your credit history, you should get free copies of your credit report every year from AnnualCreditReport.com. Here you can see whether you are building good credit and look for mistakes that could hurt your credit. When reading your credit report, look for:

• Accounts you didn't open
• Debts you didn't know about (which could have been the result of identity theft)
• Inaccuracies about your payment histories
• Any other information that you don't believe to be true

Credit bureaus are required to investigate errors you point out on your credit report. Once legitimate errors are corrected, your score will go up.

Sources:

http://money.howstuffworks.com/personal-finance/debt-management/10-ways-to-build-credit.htm
http://technorati.com/business/finance/article/how-to-start-building-good-credit/
http://www.bankrate.com/brm/news/drdon/20070116_credit_score_history_a1.asp
http://thesmarterwallet.com/2008/how-to-build-credit-establish-credit-for-the-first-time/