You know that you need a positive credit history to make big purchases, get the best insurance rates, and even get your dream job. But how do you get started? What should you do, and what should you avoid?
Start Small
One of the best tips for building credit is to start small. When you begin working or enter college, you’ll probably start getting offers for credit cards. These offers may include the “save 10% on today’s purchase” deal at a store or a preapproval email or letter from a credit card issuer. It can be tempting to sign up for everything that offers a great deal, but we don’t recommend that.
Instead, start with one card with a moderate credit limit. Use it only for purchases you can pay off that month, and make sure you make your payments on time. Making sure you don’t carry a balance will ensure that you don’t pay interest. When you’re just starting out, it’s best to avoid paying extra for anything. If you have an emergency that you use the card to cover, make a plan to pay it off as quickly as possible.
Prep for Emergencies
One of the best ways to make sure you don’t get into credit trouble is to save money. You should keep an emergency fund stocked with an amount to help you cover unexpected expenses without using your credit card. The amount will depend on your needs (does your car require expensive tires, for example) and your income, but we recommend starting with $1,000, then working up to three months’ expenses. This fund should be your first savings priority.
Keep Saving
Once you’ve funded your savings for everyday emergencies, it’s time to start thinking long-term. Beyond a fund to cover everyday emergencies, you will need a larger savings account that includes six months of expenses in case you lose your job or have an injury or other event that makes it impossible for you to work. This task can seem daunting, but you don’t have to save it all in one month. Create a plan to save a specific amount each paycheck to help you reach that goal in a timeframe that works for you. Our savings calculators can help you see how long it will take to reach your goal.
You will also want to look at retirement savings, a down payment on a home or vehicle, and other long-term plans you have.
Even when your income is limited, you will want to spend less than you’re bringing in. You’ll often hear people call this strategy, “living below your means,” and it is one of the most important financial tips you’ll ever get.
Make saving easy by doing it first each time you get paid. You may be able to split your direct deposit between your savings and checking accounts, or you may want to set up an automated transfer that occurs on each payday.
Avoid Temptation
If you’re still living at home, it can be tempting to spend a lot because you don’t have high housing and food costs. But this is also an excellent time to focus on your future and save a lot of money. You can estimate what you would be paying for housing and put that into savings each month. Or, if your income won’t allow that, choose an amount that does fit your budget. Once you’re ready to leave home, you’ll appreciate having a chunk of money saved to help you get into a new place, or maybe to offset the cost of moving to a different island or the mainland for a great job offer. Don’t deprive yourself of all fun, but focus more on saving than spending.
Buy Wisely
After using your single credit card for a while, you may be ready for another type of loan (e.g. – auto loan). The time you’ve taken to build your credit will pay off, as your positive history of making payments on time will help you qualify for good loan terms. Make sure you can afford the payments on the car while also meeting your savings goals and other obligations. Our calculators can help with that, too.
Stay on Top of It
It’s a good idea to review your credit report periodically to ensure it doesn’t contain errors and remains in good standing. Federal law entitles you to one free copy of your credit report from each of the major credit reporting agencies every 12 months. Each reporting agency may show different information, so it is best to review all three. You can request all three at once at annualcreditreport.com, or you can ask for one from one agency now, one from another agency in four months, and one from the third four months after that. Then request each on an annual basis to keep your credit front and center. Not only will you be able to address errors quickly, but looking at how your credit activity affects your report will help you focus on making smart decisions with your credit. Note that your credit score is different from your credit report. You typically have to pay for your credit score, but check with your bank or credit union. HawaiiUSA members get free, unlimited access to their credit scores in the mobile banking app.
Address Problems
Even the most detailed plan may fail, and if you find yourself in over your head with credit, don’t hide. Talk to your lenders as soon as possible to let them know your situation and see how you can work together to keep short-term problems from becoming long-term credit headaches.
You’re at a wonderful time in your life, and the decisions you make now to use credit wisely will benefit you for years to come.
Contact us to start building your credit today!