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Expert Q&A: Confessions of a Credit Card Novice

Erica Sandberg

July 7, 2011

QDear Erica,
It’s time that I admitted that I do not know much about credit, even though I’m 28. So far, I have not gotten into debt. All I have is a checking account and a bank card. The bank told me that if I don’t build up a credit history with a credit card that I would have a hard time later when I want to buy a home or do whatever else requires credit. Is this true or just part of a strategy to get me to sign up for a credit card? I actually like having just a bank card because I’m kind of scatterbrained. I’m busy and having just one account is so easy. It saves me the trouble of worrying about missing payments or keeping up with several different accounts. I have more than enough money at all times and have never overdrawn. But there’s a chance I will buy a condo within the next few years. Should I get a credit card or not? — Abby

ADear Abby,
I’m horrified that you’re such a borrowing novice at such an advanced age. Oh the shame!

Just kidding, of course. You’re neither old nor alone. No one is born grasping a credit card, all ready to charge diapers and pacifiers. It’s something you apply for when you need or want it. They just haven’t been necessary or desirable for you. Up until this point, you’ve been doing more than fine with cash.

However, if you gave that teller the stink-eye when she was suggesting that you get plastic, you owe her a little apology. She’s correct. Using a credit card or a charge card appropriately is the most efficient way to build an excellent credit rating. And trust me, if you’re going to buy a home, you’ll want to impress a mortgage lender with your borrowing and repaying prowess. If you do, it will play a large part in them offering you a loan with great terms, which can save you a boatload of dollars in the long run. Ask Erica
Regarding credit reports and scores, though, being suspicious about what you might hear would be wise. Many of the “facts” people toss around are just myths. So here’s the skinny on how it all works.

Credit bureaus collect data about you from such businesses as credit card issuers, banks, finance companies, student loan lenders and collection agencies. The bureaus then compile that information into reports that they sell back to such companies. They use them to make objective business decisions about you, based on the way you’ve borrowed and repaid. If your reports show on-time payments, little debt and a long history of handling a variety of accounts, they will look great. You can pull free copies once a year at AnnualCreditReport.com.

You will also want have a high credit score. FICO is the most common scoring model in use, and it factors in only what’s listed on a credit report. The numbers range from a low of 300 to a high of 850, and for a mortgage, you’ll want to aim for at least 720. This is not hard to achieve if you use credit regularly and responsibly. FICO is a proprietary product, and so is not free, but do check it now and at least six months before you plan on buying a home.

Now, I’m going to confess that, like you, I’m naturally on the disorganized side. An abundance of accounts, credit or otherwise, is a huge bother. So simplify. Begin with one credit card and charge once or twice a month in lieu of the bank card. Pay in full right away so you have no debt or interest to deal with.

Because you’re just starting out, you may not qualify for an unsecured card in your name only. In that case, consider a secured credit card. They’re easier to get, since a small cash deposit acts as a guarantee. After a year or so of good use, you should have enough of a positive history behind you to trade up to an unsecured card that offers sweet rewards!