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How to Build Good Credit

In an ideal world, building good credit, or repairing bad credit, is a simple two step process: borrow money; pay it back. Of course, knowing how to build good credit in today’s real economy is a little more complicated, but the basic steps are the same. A good credit score is a valuable asset in the modern world. With good credit, a person can get better deals on large purchases, can get easy approval for leasing apartments, and will have an easier time finding employment.

Building good credit can begin in the teenage years before a person can even sign a legal contract. A good first step for a young person is to open a checking account and a savings account to handle earnings from part time work and summer jobs. Future lenders will see proper management of bank accounts as a sign of financial responsibility.

People of all ages should check their credit reports at least once per year, to be sure that they contain no errors. Correcting errors in credit reports can take some time, so it should be a top priority for a person trying to build good credit.

The most important step in establishing good credit is to borrow money. As soon as a person is old enough to legally hold a credit card, she should apply for one and use it frequently. Applicants should check the fine print on any credit card offer and only choose one with no annual fee and a low interest rate. It is not necessary to keep a credit balance on the card. Paying off the entire balance every month saves on interest charges and also shows good personal financial management. If a balance does build up, the borrower should be careful to not let it go higher than about one third of the credit limit. Credit card accounts that are borrowed up to the limit do not look good on credit reports.

In addition to responsibly managing a credit card account, a person should always pay all of his other bills on time, as well. Rent and utility bills paid on time are part of a good credit report. A person with bad credit can begin to repair previous damage by reducing expenses and living within current income while always paying new bills on time, and by paying off old debts as rapidly as possible.

After a few years of establishing good credit by paying bills on time and responsibly using a credit card, a person can solidify her credit rating by taking out an installment loan and repaying it on time. Examples of installment loans are student loans, auto loans, mortgages, or even small personal loans taken out for the express purpose of paying them back to establish good credit.

Building good credit is simply a matter of establishing a track record of responsible personal financial behavior. A person who borrows money responsibly, lives within her means, and always pays bills on time will never have to worry about bad credit.

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