This week, I’ll be helping The Boyfriend move (kinda rounds out the summer of moving, doesn’t it?). In order to help bridge the gap while I’m packing boxes and dodging traffic in a moving truck, Dale Yelich has kindly stepped in with a guest post for PTY. Dale Yelich is a member of Debt Management Talk – a debt management forum that shares its revenue with their members.

A lot of younger people wonder how to build credit when they have none to start with. There are a lot of pre-approved and ?zero credit? credit card scams out there, that need to be avoided at all costs. Many people have gone down those roads and have lived to regret it.

But there are several easy and safe ways to build credit, and here are some of the best.

Step Up
Have a checking and a savings account, and always keep money in both of them. What banks and lenders look for is stability, and to that end, a bank account that has a positive balance, is a good first step.

A steady job is an incredible tool for building credit. Working a fast food place part time, or a cashier, or a shelf stocker, all of these are as good as the next provided you stick with it and show, once again, stability in that job. A paycheck is a paycheck, no matter where it comes from, nor how many hours are on it, and that?s all that any credit institution wants to see.

Those are really the first two most important things to have going for you, and no, good looks and a great singing voice won’t do. The next step is taking the plunge.

Take the Plunge
The easiest people to get credit from are gas stations. Every one has their own dedicated credit card that you are only able to use buying gasoline or anything else they might sell in their store. These are close to being the perfect cards to get for first time card holders, and if you get one, they go a long way to building up a dynamite credit rating.

Generally, if you have a solid work record and a bank account, any gas station will send you a card. Just fill out an application, send it in, and see what happens.

These are the best cards to have for someone just beginning to build credit. You can?t spend all that much on one, so financially it will be hard to get into trouble, and just having to deal with the bill every month will give anyone the feel of what having a credit card is like, and if it is right for you.

If that first gas station credit card suits your fancy, charge on it for a good 6 months time, and keep the statements paid. Paying those statements on time is the key, and a minimum of 6 months will show, once again, how stable you are with employment and paying off financial statements.

Keep It Up
If this works for you, after 6 months, apply for a major card, MasterCard or Visa, and go from there. Always pay your statements on time, and never abuse this privilege that you worked so hard to get.

One of my relatives is incredibly money-savvy. She and I can chat up about credit and retirement accounts all the time, whereas the rest of the family looks at us like we’re nuts. Yesterday she sent me a text message to let me know that her credit score is at 780 – she knew I’d appreciate what that meant.

Lambasted as we are day-in and day-out with the idea of credit (“No Credit? No Problem?” “Check your credit score FREE!” “Repair your credit NOW!”), no one is really jumping in our faces about the important part – establishing good credit in the first place. And there’s a reason – no one has any incentive to help you establish good credit except for YOU.

I don’t really have any incentive to help you out, either. But it just so happens that I do things all day long without incentive, so I guess you’re in luck.

How important is good credit, really?
Oh man, do you know how many things they can check your credit for? There’s the obvious: when you apply for a new credit card, car loan, mortgage, or any other type of loan. But it really don’t end there…

• Your credit card company can, and does, check your credit all the time. They can, and probably will, hike up your interest rate if your credit takes a nosedive.
• A landlord can check your credit when you apply for an apartment. If you pay your Visa bill late, they’re going to think you’re pretty likely to pay your rent late, as well.
• An employer can check your credit when you apply for a job. I grabbed an application for Bath and Body Works a couple months ago, and it included a “credit release” form. People who are irresponsible financially also tend to be irresponsible at their jobs.
• Your car insurance premiums can be partially based on your credit score, as well (in some states).

So basically, if you ever want to live anywhere, work anywhere, or drive a car… your credit matters to you.

But don’t some people live without credit?
Yes, they do. And it’s commendable to be able to save up for every purchase, including big ticket items like cars and houses, with cash. But the more ingrained in our society credit becomes, the more difficult life can become for people with no credit history.

The problem is, that when someone looks at your credit history, not having one can look as bad as having a bad credit history. Here’s an analogy: Say you’re going through scholarship applications, looking for a bright high schooler to give a scholarship to. The kid who doesn’t send in a transcript of his grades… how do you feel about him? Apprehensive because you have no data for him? You’re probably not going to give him the scholarship, are you? You want someone with an established history of doing well.

Is it hard to build good credit?
That really depends on you and your level of self-control. In theory, establishing a good credit history is easy as pie. Some people do it by accident! But it’s also easy to mess up and suddenly have a maxed-out credit card dragging down your score (trust me, I know).

FICO, the most common number used to represent your credit score, is all about the percentages. So focus on the following things, in order, and that’s all you have to do. Easy-peasy (in theory).

Payment history: 35% of your score

Make it a priority to never make a late payment, and 35% of your score is in the bag. Don’t freak out if your payment is a couple days late, however – late payments aren’t generally reported to the credit agencies until they’re 30 days late. But since you’ll still get slapped with a late charge if you’re even 10 minutes late with a payment, better stick with Never Make A Late Payment.

Debt ratio: 30% of your score

The percentage of debt you’re carrying, compared to how big your credit line is. This only applies to revolving balances (credit cards and home equity lines of credit). Basic rule of thumb: if you’re using more than 30% of your available credit, then you’re dragging down your score.

Understand that this is calculated across all of your revolving lines of credit. So if you’re using $500 on a credit card that has a $2000 limit, and $1000 on a card that has a $5000 limit, then you’re using $1500 out of your available $7000, or 21%. But if that $2000 card is maxed out, and you still have that $1000 on the other card, then you’re using 43%. Ouch.

This is calculated whether or not you pay off your balances every month. So if you’re going to get a loan/new job/new apartment in the next six months, Don’t Charge A Lot On Your Cards, Even If You Pay The Balance Off Every Month.

Length of credit history: 15% of your score

There’s not much you can do about this if you’re just starting out, except START NOW. Luckily, if you’re a college student and you have taken out student loans, at least you have something on your credit history. But you might want to consider getting a credit card now to help establish a payment history.

Feel like you’d go crazy if you put a credit card in your hand, and get yourself into a heap full of debt? Yeah, been there – done that. Self-control is a difficult thing, and only you know how capable you are with it. You’ll just have to figure this one out for yourself.

Trying to fix a bad credit history? Don’t make the rookie mistake of canceling all your credit cards. Keep the one you’ve had the longest that also has no annual fee. If you cancel your oldest card, you truncate the length of your credit history, and your score could take a nosedive.

Types of credit used: 10% of your score

Variety is the spice of life, and apparently it’s also part of the recipe for a good credit score. Just having a credit card is apparently, not good enough. Ideally, they’d like you to have a credit card, a car loan, student loans, a mortgage, and a home equity line of credit. Which is not to say you should run right out there and get all those things. Since it’s only 10% of your score, don’t worry about this too much, just keep it in mind.

Recent credit inquiries: the final 10%

There are two kinds of credit checks – a “hard pull” and a “soft pull.” A soft pull is when you check your own credit score. Or when a company checks your score to see if they should send you some junk mail. Just about any other kind of credit check is a “hard pull,” and will take a hit out of your credit score. Most of the time, these are unavoidable. Don’t worry about this too much, but understand that it means that if you go out and apply for every credit card on the planet in a two-week time span, your credit will nosedive.

What about piggy-backing?
In the past, a good way to build credit was to have someone with excellent credit list you as an “authorized user” on one of their credit cards. Then, all the good credit history from that card would show up on your report. Sorry, but FICO has decided to stop counting authorized users as of this fall, so this will no longer work. You’ll have to build your own good credit.

So… is it hard or what?
It’s easy to build good credit, but it’s also easy to slip up. Life happens – just ask the $1500 balance sitting on my credit card. The key is to not be discouraged, use your brain, and keep doing the best you can. Nobody’s perfect, but we can aim for great credit scores.

Sources:
Wikipedia – Credit Score
My Money Blog – Future FICO Scores Won’t Consider Authorized Users

I have a fair number of gamer friends, so I often get caught up in conversations about World of Warcraft. Usually I let my eyes glaze over, and try to pretend I’m somewhere else, with friends that don’t play WoW. But lately I’ve been spinning the conversation around, trying to gauge how my gamer friends feel about the new WoW credit card. The response so far as been universally: “It’s a good card, I was thinking about getting it.”

In my stupor, I forgot to ask them how they define a “good card.” So I figured I’d take a look at the card myself, and give an evaluation.

The Hooks

Pretty! – This credit card has some flashy ways of trying to pull WoW players into getting the card. First of all, they’re offering 13 different designs to choose from – enough that every single player can find one that makes them say “Oooo, pretty!” However, that’s completely irrelevant as to whether it’s a good card or not. My credit card is black with purple glitter! Doesn’t make it awesome.

Rewards – The main pull of the card is the rewards program. The site defines it as “Accrue World of Warcraft gametime at the rate of 1% of every dollar in qualifying purchases.” What that means, in English: For every $1,500 you charge to the card, you get a free month of WoW. You also get one free month just for getting the card and using it once.

A 1% rewards program is pretty pitiful. Also, the points you earn aren’t transferable to anything else, even to another WoW account. So if you decide to stop playing WoW (it could happen!), you can’t get anything else with your accumulated points, and you can’t sell that month of access to anyone else. You’re stuck. Tricksy way to keep you playing WoW? Yeah, I think so.

But if you’re truly gung-ho about the game, and have no plans to ever give it up, then this is a fair reward for you. But just to put it in perspective: if you were to only charge your monthly WoW access on the card (and nothing else), it would take you 100 months (over 8 years) to earn a free month of play.

Introductory 0% APR – This, as far as I can see, is the best feature the card is touting. 0% APR for 12 months on all purchases and balance transfers. Balance transfers still carry a 3% fee, up to $75, but that’s becoming pretty standard. The rates after the intro period are actually pretty good – if your credit is excellent, you’ll get 9.99%, if it’s good, 11.99%, and less than good, 13.99%. Of course the rate is variable – they can change it on you at any time for any reason. Standard icky credit card practice.

The Other Terms

The rest of the terms of the credit card are rather important, but I’m willing to bet most people don’t look at them, or do, but don’t understand them. But they’re still really important to know before you apply for any card.

Cash Advance APR: 23.85% – Don’t get a cash advance. They’re so painful!

Penalty Rate APR: up to 31.85% – The rate you’ll get if you’re late on a payment. I’m willing to bet there’s also a Universal Default clause hidden in here somewhere. That means this is the rate you’ll get if you’re late on ANYTHING – even your electric bill or your cell phone bill.

Grace Period: not less than 20 days – This is the amount of time from when your statement ends for the month until they start charging interest. Pay your bill in full in this time frame, and you’ll never be charged interest.

Method of Computing the Balance for Purchases: Average daily balance (including new purchases). – This is good. What you don’t want to see here is “two cycle billing.”

Annual fee: None. – Good! Unless a rewards card is really, really, spectacular, and you know you’re going to charge enough to take advantage of it, you never want to pay an annual fee.

Over Limit Fee: $35
Late Payment Fee: $35 if your New Balance is less than $500; or $39 if your New Balance is equal to or greater than $500.
These fees are painful, but pretty standard. Remember, not only will you be charged the late fee, but your interest rate might jump to upwards of 31.85%.

So… good card?

Yeah, it qualifies, if you’re an avid WoW player who’s going to charge enough to get the real benefit out of it. The 0% APR intro period is nice, too. Just remember, once that intro period is over, you have to pay your balance in full every month, or else the interest charges will almost certainly cancel out your rewards.

Reader Vj dropped by with the following question:

If you have $10,000 worth of credit card debt at 10% interest would it be advantageous to get a loan from your 401K to pay it off and pay yourself back?

According to Liz Pulliam Weston over at MSN Money, this is one of the 7 most common 401(k) blunders. I’m not sure things are so black and white, but here’s what her article says:

What seems like a great idea — Borrow your own money! Pay yourself interest! — has plenty of traps for the unwary:

~ The biggest pitfall is the risk you take should you lose your job. Your loan would become due, and, if you couldn’t pay it back at once, you would owe income taxes and penalties on the unpaid balance.

~ The interest rate you pay yourself may be lower than what you would pay most other creditors, but paying yourself interest is no substitute for the real return you would be earning if you had invested those payments instead.

~ Borrowing from your retirement funds is often a sign that you’re overspending — particularly if you’re using the proceeds to pay off credit card debt. People who use “easy outs” like 401(k) and home-equity loans to pay off their cards often don’t change the underlying behavior that put them in the hole. They just run up their balances again, winding up another day older and deeper in debt.

There are several great points in there, but in the end it is still a possibility. But I would rank it as a “last resort.” Then again, if you’re having trouble paying your credit card debt, wouldn’t you also have trouble paying your 401(k) loan?

There are some definite alternatives you should look into first. Try this:

Find some “0% APR for one year on balance transfers!” credit card offers. These are very common – Chase is offering it on their Freedom card, currently. There’s always several floating around. Read over the terms, but don’t apply yet.

Call up your current credit card company, and tell them, firmly but politely, that you’re going to get this 0% balance transfer, and move your money off their card. Chances are, they’ll offer you a lower rate. Take it. This way, even if you can’t move your money, or if you can only move some of it, you have a lower rate on the original card.

Apply for that 0% balance transfer card, and hopefully, you’ll be approved. Move as much of the balance as you think you can pay off before the introductory rate ends. This part is very important. If you can’t pay off the whole $10,000 before the intro rate is up, and the regular rate isn’t better than your original card(s), then only move what you can pay off in the year.

This plan assumes that you’ve been making regular payments on all of your cards and bills, and thus have a clean enough credit history to qualify for a 0% intro rate. Since the original question had 10% interest rates on the credit card, that’s a pretty safe assumption (if your recent credit history was bad, you’d be looking down the barrel of 30+%!).

All in all, the 401(k) is not the first place I would look, not by any means. Do you have savings sitting around earning less than 10%? Do you qualify for a Lending Club loan at less than 10%? Is there anything you can trim down in your budget to free up some more funds for paying down this debt? If you can’t spend less, can you think of any ways to earn more?

Oh, and cut up the card(s) until it’s paid off. Once it is paid off, if you feel that you can use it without carrying a balance month-to-month, you can always call up the card company and have them issue you a new one. But no matter what method you use to pay down your debt, especially if it’s a loan from your 401(k), the key is to not charge anything more to that credit card.