Managing Your Credit: How To Build It & Avoid Trouble

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The following is a guest post by our friend John from Fearless Men. If you are interested in guest posting at Club Thrifty, please see our guest posting guidelines.

Fiscally responsible, financially conscious – these are phrases that will have a lot more meaning to you when you start building your own credit. Why? Because when credit is used it turns into debt, and it’s at this point you will begin managing your credit. Millions and millions of people have mismanaged their credit, and they lose the luxury of using credit for years after. We want to help you avoid those pitfalls.

Is It Important to Build Your Credit Early?

You’re darn right it is. Your credit rating dictates interest rates, terms, and the eventual approval or disapproval of your loan. Let’s look at a few reasons it’s important to build your credit early.

1. Major Purchases: The two biggest purchases a young person makes are – a car and their house. Your credit plays a major role in getting the best rates and terms for both. Some people say: “No credit is good credit.” This may have been true 50 years ago, but this isn’t true these days. It’s a money myth! Banks and lending institutions are credit sensitive, and having no credit history scares the pants off of most lenders. Especially with these major purchases.

2. Accessories: Along with the major purchase come the incidentals – furniture, appliances, utilities, cable. The places and businesses providing the goods and services want to see your credit rating. For instance, the utility companies will ask for a cash deposit if you don’t have a good credit rating.

3. Car Insurance: In many states your credit rating influences your car insurance rates. Yes, believe it or not, they will include your credit rating in their formula for assessing insurance rates.

 4. Better Dating Material: Having excellent credit is attractive. I’ve heard that some ask for this info on 1st or 2nd dates now. With the economy crisis no wonder it’s on people’s mind.

Staying Out of Trouble and Keeping Your Score Clean

It’s extremely important to manage your credit properly. Whipping out your credit card becomes an automatic response when you want to buy something, it’s easy. Sometimes too easy, and how many people do you know who are in financial straits because of it?

Let’s look at some of the reasons you need to manage your credit properly.

1. Jobs: Some employers will factor in your credit history when applying for a job. Their reasoning is – “someone who is financially irresponsible may also be irresponsible in their job.”

2. Emergencies: We never know when an emergency arises; this is why they’re called emergencies. Maintaining a good credit rating insures that if an emergency does happen, you will have access to the needed credit/cash for that incident.

3. Business Loans: You can’t predict the future, and it just might be that you want to start your own business one day – but if your credit is bad, then that could close the book on that idea.

The Pitfalls of Mismanaging Your Credit

Many of the benefits of having good credit (covered above) go away when you mismanage your credit. Mismanaged credit can cause big money problems, and this leads to financial stress as well as emotional stress.

Bankruptcy is generally the final outcome of unmanageable debt; it stays on your credit record for 10 years.

Some families end up in divorce because of debt problems.

Credit is a wonderful financial tool to have. Building your credit early on reaps benefits far into the future…if you manage it right. The key is “only charge what you could buy with your cash on hand.” I know, easier said than done – but many have done it, and so can you.

Editor’s note: Club Thrifty has a love hate relationship with building credit. As John pointed out, using credit means going into debt, which is not something that we would advise. However, we have used debt ourselves and use our credit to our advantage – particularly when it comes to earning credit card rewards. We simply don’t recommend taking out loans in order to build your credit score. For more on our credit score stance, check out Greg’s post here.

John is the co- founder of Fearless Men, a blog for all to engage and discuss character growth, fitness, relationships and finances.  John has lived in 9 countries, is an Army veteran and wants to go white shark cage diving one day. He enjoys sports, reading, volunteering and learning. He is passionate about invigorating other men to join the adventure in becoming better men. Follow Fearless Men on Twitter, Facebook or G+.

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  1. Using credit doesn’t mean going into debt. For example, I use my credit card regularly, but I pay it off in full every month. I have a margin account at my brokerage, but I have the funds elsewhere to cover the interest if I need to use margin. The only purchases I would ever consider taking on debt for would be buying a home (or investment property) or education.

    1. Well technically once you use some of the credit you are now indebted to the lender regardless of if you pay it back on time. I get what you mean though and you have a good strategy for managing your finances.

  2. I learned first hand how credit can impact a job opportunity. I had applied and taken a job several years ago and right before I got the offer they called asking me about the credit card debt I had paid off nearly seven years prior to that. I had thought they were being a bit sensitive, but they were concerned about it. Thankfully I was able to convince them that those days were long behind me.

    1. Glad to hear you were able to convince them! I’ve been checked by a couple employers. At my current job they did a thorough credit check and thankfully I passed.

  3. “I’ve heard that some ask for this info on 1st or 2nd dates now.” Yikes. That’s all I have to say about that. But on a more serious note, I think building and maintaining your credit is incredibly important, and the sooner you get started the better. I had a credit card at 16 and it helped give me a head start at building my credit.

    1. Right?! I think that’s a bit extreme…but I have heard of cases where 2 were dating and it wasn’t until getting engaged that one mentioned they were 6 figures in student loan debt. This is where it makes you want to ask earlier, but still, I think there’s a more tactful way than asking for their credit score. Personally, I’ve never been asked. But I keep a copy from all 3 agencies in my back pocket. haha!

  4. We never really worried too much about our credit ranking, so far it hasn’t been an issue for us as we have never been denied access to credit.

    1. Glen, glad to hear. Perhaps you were the beneficiary of starting off financially responsible.

  5. Very cool post! I used to be so anal about my credit score, etc. But since I ditched credit cards I haven’t even checked. My days of big purchases are over. Since I have a mortgage on the report, I am not so worried about it going down.

    1. Tony, like you, since I got my mortgage and won’t be refinancing any lower I haven’t been too worried about my credit score. But before I was on top of it for any changes because I knew how important it would be for big purchases.

  6. I check my credit score religiously to make sure there are no issues with it. It really irritates me that the credit bureaus are the ones responsible for reporting and then I get all of these advertisements for me to pay them to give me updates. Something just seems very wrong with that.

    Also, I’ll admit I laughed when I saw the bit about dating, but it probably isn’t too far off. Considering things like school debt and housing, it can be a very serious issue for couples.

    1. I used to also check my score religiously. But now that I’m done with my major life purchases I let my credit monitor let me know when my score has changed. Yea, I’m also not a big fan of paying to know. But thankfully the prices have gone done.

  7. We keep an eye on our credit score but it is usually pretty good. Granted we are in debt, but we are never late on payments. Our score has slowly increased over the past two years since we have been able to reduce the D/I ratio. The first commentor makes a great point that credit doesn’t equal debt.

    1. Alan, glad to hear you’re never late on payments. I saw the first comment to and actually using credit does equal debt regardless of if paid back on time. There’s good debt and bad debt.

  8. honestly, I´m glad that I´ve not grown up in a society, where everything is paid by credit. I know that many people use it wisely, and that there are many benefits from using American credit cards, but when you constantly read about all these people who get in serious debt because they don`t know how to handle credit… then I`m quite satisfied with using my debit card and never using money that I don`t actually have.

    1. I’ve also often wondered how different it would be if we went away with credit. In your country what type of financial problems arise from individual mismanagement?

  9. Work is becoming a huge one. Many employers now refuse to hire people with poor credit ratings. Want the good job? Good employers hire people who take care of themselves.

    1. My employer deals in some of the financial industry so they only hire people with good credit. It’s like you said, they want financially responsible people. Being responsible is not enough for all.

  10. Credit is unfortunately necessary for many things these days and if you have good credit it can save you a ton of money! Luckily it has never been a problem for me but I can see why many would hate it after getting in trouble with credit early in their lives.

    1. When I got my mortgage and then refinanced my credit score made a big difference. I know others who got 1-2% higher because of their lower credit score. I was definitely thankful I managed mine and was taught even when I wasn’t fully aware of all the consequences.

  11. Nice article John. I built my credit early and that has benefited me greatly. I have excellent credit, probably because I always paid my debts on time and never defaulted. Credit is more than just a number and it is still very important.

    1. Glad to hear building your credit early has paid off! It’s similar to compounding interest in that even if you start small and young you’ll reap big benefits down the road.

  12. If you spend less than you make, credit problems should never be an issue. Sadly, you can spend too much and still have excellent credit as long as you make the minimum payments. I think there is a healthy balance in there somewhere between taking on a mortgage and using credit cards responsibly vs putting everything on installment payments just because you can.

    1. I agree Kim that there is a healthy balance. I strive for it and so far it’s been working out. All the reading and studying paid off. 🙂

  13. Credit definitely has it’s advantages, but I honestly don’t care too much about it. I don’t put ANY thought into it, and we happen to have a high score. Having credit cards that we pay in full, and (regrettably) a student loan have probably help build our score up. But I won’t go out of my way to make it any higher. I like how Dave Ramsey calls it an “I love debt” score.

    I would NEVER recommend financing a car. Actually, I fell like that is the financial downfall of the middle class. But besides that, having a good credit score is fine and all. Heck, if you use credit cards wisely and pay all your bills on time, it should come naturally. And once you have a good one, you can take advantage of credit card rewards like Holly and Greg (and me), and lock in a low rate on a mortgage. Otherwise, I’d say forget about it.

    Now, if you’re credit is so bad you can’t get a job, might need to work on that, but pulling out more debt or credit cards is NOT the way to go about it.

    1. I think you nailed on the head with this statement, “Heck, if you use credit cards wisely and pay all your bills on time, it should come naturally.”

      This is why it’s important to start early and start right.

  14. I am an insurance agent and as far as credit ratings and auto insurance, having bad credit can nearly double your rates. I have also seen some homeowners companies that won’t let people schedule an item that has more than $10,000 in value if they have bad credit.

    1. A few years ago I went to help finance a car with my sister and the guy next to us was taking out a 15%+ loan because he got turned down everywhere else for bad credit. I can’t imagine what his payments are. It’s awful!

  15. Great article John. Credit is really a double edge sword and can help you out in life and ruin it just as quick. I’ve managed to keep a pretty good credit score but as result I do have some credit card debt. I think the real challenge is to have a balance between the two without driving up the debt so much.

    1. You’re right Chris! There’s a healthy balance. Having some credit card debt isn’t bad for ones overall score. But having a lot of unpaid debt is bad.

  16. Great article. I see a lot people who have a who cares attitude towards credit. They don’t get how bad money decisions can follow them around and affect them for years until they are denied a loan or even a job! And now possibly even a 3rd date!! Times have certainly changed since I dated, but I understand why people want to know what they are getting into before the continue with a relationship.

    1. I don’t think student loans would be a deal breaker for me but I would want to know before becoming committed or engaged. To me the persons financial management attitude and if they’re responsible is important. Now obviously it’ll be hard to determine that in 1 or 2 dates. The “who cares” attitude is one of the most dangerous. It just shows how little they know about what good and bad credit can do for your future.

  17. I really think maintaining a great credit score is critical BEFORE you buy a house and maybe for a few other minor reasons, but once you’re past that stage in your life, I don’t find it that important to over-obsess about it. If you’re reasonably responsible, you’ll be fine. I certainly wouldn’t sacrifice my financial independence just to say, keep my credit usage active. (Keeping in mind, of course, the score has more to do with how profitable you are vs. how big of a risk you are.)

    1. Absolutely! The BEFORE is crucial! It’ll get you good deals on the major life purchases. I’ve found that those who start responsible usually carry it on because it becomes a habit and engrained in them.

  18. Having a great credit score is something that’s important if you’re going into the financial field. As John pointed out, they want to make sure that you’re financially responsible with your own money to make sure that you’re able to handle other people’s money.

  19. When I moved to Canada I had to build my credit up from scratch. The only thing it’s been good for was getting the mortgage for me. Other than that I paid cash for my vehicle and I’ve never really used it for anything else.

  20. Can’t decide whether to get a book on this myself, or just read a load of websites. Can there be so much to it?

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