How can I establish good credit?

It might be hard for you to obtain credit if you have never opened a credit account before.  This is because banks have no way of knowing whether you will pay your bills.  It may be good to start off small.  For instance, opening up a credit account at a department store may be a good way to start because your credit limit will be much lower than a regular credit card.  You should pay your bill on time each month and try to only charge what you know you can pay back.

EXAMPLE: If you only make $500 per month, then it might not be wise to use a credit card to buy a TV worth $200 because it will take you a long time to pay it back.  You might find that you end up paying much more than the original $200 when you are done paying off the balance.  This is because interest gets added to the original amount charged (which is called the “principal”).  The longer it takes you to pay off the balance, the more interest gets added on, and the more you have to pay back.  This is how most banks make money.  If you do not pay your bills on time, banks can also charge you late fees and increase your interest rate even more.  You can get into really bad debt if you are not careful.

Also, it is never a good thing to open up too many accounts.  While having one account and paying it on time may be a good first step to establishing your credit rating, having too many credit cards or department store accounts can lower your credit rating.  This is true even if you have not charged anything in a while.

Learning how to manage your finances and establishing good money habits now can help prepare you for independent living!