Healthy habits, understanding key to good credit

Question: What are some ways to build good credit?

Answer: Establishing credit as a young adult often starts with understanding the important role credit plays in your life. A credit history, measured by a credit score (FICO and Vantage are the most common), will be the first thing lenders look at when you apply for a credit card, home or car loan. The credit score rates your risk as a borrower. Good credit helps you secure lower interest rates on big purchases like mortgages and cars, and gives you access to credit cards with the lowest rates and the best rewards.

To build your credit history, start small. While you might not be approved for a card that gives travel perks and cash back, you will likely be able to get a secured credit card, which is backed by a cash deposit or bank account funds. Your bank or credit union might offer approvals on their credit card products based on their relationship with you.

Above all, understand the responsibilities that come with credit cards and loans.

Payments must be made on time, or you could face late fees along with a ding to your credit score. Don’t charge more than you can pay off. Monitor your budget to make sure you are living within your means. Credit is a tool — not free money.

Q: Are there certain things you shouldn’t buy with a credit card?

A: You can buy anything with a credit card, as long as you can afford it. Credit cards are a useful tool for building credit, provide greater security than debit cards and offer rewards on travel, dining, grocery shopping and many other purchases. But far too many people fall into the trap of purchasing more than they can afford and paying just the minimum amount on their bill, leading to credit card debt that can take years and thousands of dollars in interest to pay off.

To avoid that, pay off your credit card bill in full each month to avoid accruing interest. Contrary to what many consumers believe, you do not need to carry a balance on your credit card from month to month in order to build credit.

Q: Is there such a thing as healthy debt?

A: Yes — to a point. As long as you pay your bills on time, installment debt (mortgage, auto, student and business loans, for instance) can help you build a healthy credit score as the years go by. These accounts show you have the ability to handle debts responsibly over time.

Revolving debt weighs more heavily on your credit score than installment debt, meaning the balance you carry on your credit card has a more significant impact than the balance you carry on your mortgage. Using too much of your available credit can negatively affect your credit utilization ratio, which in turn lowers your score.

Q: Could you provide an example of what a good credit-building scenario would be for a young professional?

A: Parents might consider adding their responsible children as authorized credit card users, and paying off the account in full every month. This helps establish a credit file that will put individuals ahead of their peers at a relatively young age.

For recent college grads, healthy financial habits are key to maintaining good credit. Create a budget, monitor your spending, pay off your card balance in full each month, make timely payments on loans and bills, and remember that all credit must be paid back eventually.

Q: What are some resources available that can help build good credit or stay on top of bills?

A: Mobile apps are a great way to keep track of spending and schedule bill payments.

Your bank or credit union may have its own app that can help you monitor your transactions so you can be sure you’re staying within your budget. At Hawaii State FCU (Federal Credit Union), we have a suite of mobile apps to help members manage their accounts on the go.

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Interviewed by Kathryn Mykleseth