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How to Build Good Credit

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You likely know the pivotal role good credit plays when you try to buy a house or a car.

It’s likely too that you don’t buy houses and cars every day, so maintaining a credit rating seems like a back-burner need. Not so, and here’s how to keep your rating up.

Building and maintaining good credit helps create a solid financial foundation and eventually becomes a linchpin of your overall financial plan.

These steps help build credit:

Apply for a credit card, not 10 credit cards. Make some purchases each month and avoid nearing your credit limit. Lenders generally look down on you maxing out your limit every month. Pay your credit card bill on time.

Also, keep your first credit card — the longer you hold a credit card the more credit builds on it. Cancel the card and you lose the history and credibility you build with that creditor or lender.

One safety stop for problem spenders: cards carrying no annual fees or that come with low credit limits. Use this card for emergencies and, again, pay your balance monthly and spend no more than you can pay off in a month’s billing cycle.

Some debt is okay. Good debt includes purchased items that increase your overall wealth and that no expects you to afford to pay off immediately, such as loans for tuition, a car or a home mortgage. Just make each installment payment on time to show lenders you are creditworthy.

Other types of debt walk the line between good and bad, such as costs of small-business ownership or real estate investments. These help your credit rating when they succeed and damage your rating if they fail. You must carefully judge the risk for yourself.

Carrying balances on your credit cards constitute some of the worst debt, if for no reason other than that they tack on interest rates higher, often much higher, than rates on consumer loans. When possible, pay for such expenses as gas or meals out with cash on hand or with a card only if sure you can pay the balance at month’s end.

Check your credit report at least once a year. First, verify the information as correct — especially considering today’s prevalence of identity theft. Verify that the credit cards and loans on the report belong to you and confirm the information about your balances and payment history as accurate. Also make sure all of your creditors report on all your accounts.

You probably view credit reports the way most people fear shadowy, all-knowing powers that can wreck a life. Know that most lenders rely on reports like those from FICO, which bases scores on five areas: your payment history, current debt, types of credit used, length of credit history and new credit.

Each year you can get one free credit report from each of the national credit-reporting bureaus. Review your credit history every three months with a report from a different agency.

Building credit and credit history takes work and sometimes a little courage to hear bad news — just like anything that pays off down the road to improve your financial standing and quality of life.

About the Writer
Thuong Thien, CFP, is a senior associate consultant at Wipfli Hewins Investment Advisors LLC in San Mateo, Calif.

The information presented herein is standard information and intended only as a broad discussion of generally available incapacity-planning tools that a reader might consider discussing in detail with their attorney or other qualified professional advisor(s). None of the information contained herein is specific to the laws, rules or regulations of any state or other governing body, and as such cannot be construed as, or used as a substitute for, legal advice. Further, none of the information contained herein has been written or personalized for any individual, and the information may not be applicable or beneficial to anyone’s personal situation(s). The documents and processes identified herein can be complicated, and in many cases require the assistance of a qualified attorney to execute effectively. To the extent that you have questions about or wish to make use of any of the tools or processes identified herein, you are encouraged to seek the advice of your attorney. You assume full responsibility for your use of the general information contained herein and acknowledge and agree that by using the information contained herein Hewins Financial Advisors, LLC, its affiliates, agents and/or employees shall have no responsibility or liability for any claim, damage or loss resulting from your use of such information.

Hewins Financial Advisors, LLC and Wipfli Hewins Investment Advisors, LLC (together referred to as “Hewins”) are independent, fee-only investment advisers registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. Hewins is a proud affiliate of Wipfli LLP. A copy of Hewins’ current ADV Part 2A discussing our investment advisory and financial planning services and fees is available for review upon request.

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