Q: I’m about to graduate from college and get married. What’s the best way of creating a good credit score for myself? - Colby (at a presentation)
A: Colby, there are certainly several good habits that a person needs to practice in order to build a good credit score, most of which are probably obvious. Things like making all of your payments on-time and in-full, don’t open too many credit accounts at once, and then keep those accounts open for a long time. The key to building a good score lies far less in the amount of the payments you’re making, but in demonstrating that you can and will pay your full balance without needing to be sent to collections.
The harder part is getting someone to give you credit in the first place when you don’t have a history they can look at. But there are a few options. One is to take advantage of a secured credit card. They aren’t hard to find at most institutions which issue credit cards. And because they are backed by money that you will have already put on-deposit with the institution, there is no risk of you defaulting. That said, that deposit is intended only to be used as collateral, so you still need to make a monthly payment. And that is where your credit is built.
A second easy option is a credit-builder loan. Unlike a conventional consumer loan, the bank or credit union from whom you borrow the money keeps that money until you have paid the loan off in-full (and on-time, please!). Now, there are services offered on-line that track your bills such as rent and utilities and put that data onto your credit report, but not every credit score takes such services into consideration. Still, these are three good options to start, and they should be enough to create a score for you as you move into marriage, home ownership, etc. Good luck!
Q: How do I know that my money is safe in the bank? With interest rates so low anyway, it seems like I might as well keep it in my desk drawer where I can keep an eye on it. – Dave (via Facebook)
A: Dave, you’re certainly not wrong about the rates being laughably low right now, but I’m not sure I’d forgo interest entirely by keeping all your money under the mattress. After all, some interest is better than none. But more importantly, in a bank or credit union, your money is insured by either the Federal Deposit Insurance Corporation or the National Credit Union Administration. More commonly referred to respectively as the FDIC (for a bank) and NCUA (for a credit union), they insure each of your accounts, at each of your financial institutions, for up to $250,000 each. In other words, my savings account at XYZ Credit Union, my checking account at XYZ Credit Union, my savings account at ABC Bank, my checking account at ABC Bank, etc. are each insured up to that amount. You’d have to check with your homeowner’s insurance agent, but I’m willing to bet that if your house burns down and you tell State Farm that you had a quarter of a million dollars in cash in your desk drawer, they might look at you a tad askance.
Both the FDIC and the NCUA are government agencies, and the FDIC put their $250,000 limit into place as a result of the Dodd-Frank Act in 2011. Although President Trump has dramatically rolled back the consumer banking protections put into place by Dodd-Frank, that particular limit has remained untouched...so far.
Dave, we buy insurance on our homes, on our cars, on our health, on our life. This is insurance on our money, and we didn’t even have to pay for it.
On a side note, since you mentioned low rates, you could consider online financial institutions. By merit of not having all of the physical infrastructure that brick-and-mortar financial institutions have, I’ve seen savings rates for online-only banks as high as 2.25%. Although I personally haven’t made the switch, I’m getting tempted.
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— Eric Litwiller has spent the last eight years of his professional career helping people achieve their financial goals through the use of budgets, retirement vehicles, and estate planning options. He is a firm believer in the importance of using Earthly riches to fulfill a mission of Christian stewardship. Eric is not a licensed financial planner.