Opening, closing new cards won't build credit
A college student mistakenly believes that brief card usage builds good credit
Dear Opening Credits,
I'm a college student with no credit. I want to know if I open a credit card with Discover, then put things on the card maybe two times then paid it off little by little until I paid it all off and closed the card will it hurt my credit score? And also, I have my car in my name that I am paying off to build my credit. So is opening up a credit card account a good move or not since I'm going to close it after I pay off what I needed to pay? -- King
Where on earth did you got the notion that opening a credit card account, productively charging for a while, and then canceling it is positive for a credit score? Someone, somewhere must have told you such a myth. I really wonder how these odd ideas get started.
I do want you to begin your relationship with credit in a healthy way and you can -- as long as you follow the real rules. Here's what you need to know and do:
Get a credit card and KEEP it. You mention the credit issuer Discover, and though it is a fine company, be sure to research all the available deals before applying. When you identify the credit card that seems best for you, apply. It's important to choose carefully, because it will be the card that you're going to have and use for a very long time. There is no reason to close a well-managed account! In fact, establishing a long and positive history with a creditor is one of the best ways to build up a great credit score.
Anthony Spruce, a representative for myFICO.com (the company that developed the FICO score) confirms this: "Once you open a credit card account, it is best to keep it open even if you stop using it. Length of credit history -- how long you have had credit -- accounts for 15 percent of the FICO score. If you were to close an account that you've had for a long time, it could significantly alter your credit history if your other credit accounts are much newer."
Charge regularly and repay responsibly. Yes, when you have the plastic, use it. More than two times, though. Choose one regular expense to charge to the card, making certain that it's something that you can afford. For example, if you spend $300 a month on food, use it to buy groceries. Then pay the entire balance (not the "minimum requested payment" you see on the statement) from the money you have in your checking account. Look for the due date, too, and send the money in well before it.
Understand the credit reporting system. As soon as you're approved for the credit card, the issuer will start to send details about your activity to the three major credit reporting bureaus -- TransUnion, Equifax and Experian. These companies take all the information about you and your credit patterns and turn them into files.
As for your car, that's an installment loan and your payments are also being recorded. Treat that loan perfectly, too. Future landlords, employers and creditors will be accessing your reports, and there shouldn't be anything on them that you're ashamed of or will need to explain.
Create a high credit score. All that credit information on your reports is also being turned into a numerical score that banks and other financial institutions use to gauge lending risk. FICO scores range from 300 to 850, and currently an attractive score is in the mid-700s. It takes a while to build a good score, but it's totally achievable.
In fact, myFICO.com just revealed the key habits and behaviors of people with scores of 785 and above. The not-so-shocking news is that these "high achievers" simply kept their balances low (in relation to the amount they could borrow) and consistently made their payments on time.
Finally, King, I encourage you to keep learning about money and credit management. The more you know -- from credible sources -- the better off you'll be.
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Published: October 31, 2012
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