Scoring High with Credit

If you have a credit card or a student loan, you have started to create a credit rating. Since establishing a good credit rating is vital to your financial future, it's important to know how to best manage the money you've borrowed.

A (credit) history lesson

Your credit history begins when you start to borrow money and it continues throughout your life. Any time you need to borrow, a lender (e.g. your bank or the government) needs to check how responsible you are.

To evaluate your reliability as a borrower, the lender checks with the credit bureau, an agency that tracks the creditworthiness of individuals. These agencies look for information on your credit rating and credit history.

Just as your resumé describes your work history, your credit history is a record of your financial decisions. And your credit rating is like a mark on a report card - it indicates how well you follow the rules of borrowing.

How it works

Let's say you lend out two books to two friends. Who will you lend to next time?

One friend returns the book a week later, in perfect condition.
The second friend doesn't return the book for months. When the book arrives, there are coffee stains on it and the pages are rumpled.

In this scenario, you are the lender and you and your observations act like the credit bureau. The credit bureau keeps track of when your payments come in, and how you manage your lending privileges.

If you often pay late or spend more than you can pay back, your credit rating will suffer and the lender may decide you're not the best person to receive a loan.

Your goal is to show them you can handle the responsibility by paying on time and using good judgment.

Advantages of a good credit rating

A good credit rating will help you get car loans, student lines of credit, mortgages and maybe lower interest rates. Having a bad credit rating can hurt your chances of obtaining any of these.

You can start building a good credit history now - by applying for credit sparingly, paying your bills on time and trying not to get stuck with a balance you can't afford to pay back.

How to build good credit

Several golden rules help establish a good credit rating. By sticking to the guidelines below, you'll develop valuable credit management skills.

Pay on time - Late payments can seriously damage your credit rating.
Keep your outstanding credit card balance low - Leave lots of space between your outstanding balance and credit limit. And never exceed your limit! If you do make large purchases on your card or need to keep a higher balance, try to keep a revolving balance (meaning the balance doesn't stay locked in one place for too long). That way, the lender won't get the impression you're stuck in a bad position.
Pay more than the minimum - This will bring your balance down more quickly. You'll also save interest charges by paying off as much as you can.
Avoid cash advances - Using a credit card for quick cash is an expensive trap, since interest is charged on the money from the day you borrow it. But do keep in mind that cash advances are available - and a handy way to get out of an emergency situation.
If you're falling behind, ask for help - Talk to your family if you feel you're in over your head, or consult a bank representative or counsellor at your school.

It also pays to cultivate some good credit habits. Remember, credit mistakes can remain on your credit report for a long time! Try these additional tips:

When you make a large purchase, pay it off before you buy something else.
If you see your outstanding balance growing, leave your credit card at home until you shrink it.
Make your payments a few days before the due date. If you're forgetful or put things off, find a way to get your payments in on time. Write yourself a note. Mark it on your calendar. Do whatever you have to do to pay on time.

Poorly managed credit can lead to major financial problems. If you thought classes, exams, and tuition were tough, try adding a big creeping debt to the pile. Now that's stressful!

Stay on top of it

Even if you're doing everything right, you should still check your credit report. A credit report is a record of your past financial transactions. You can order a copy at Equifax or TransUnion. Check the Related Links section for links to these credit bureau websites.

The information in this article is general only; it is not intended as specific investment, financial, accounting, legal or tax advice for any individual.