Borrowing & Credit

Establishing Credit

Contrary to popular opinion, earning a fat income or loading up on credit cards is not the best way to establish your credit. The most important item in computing your credit score is your payment history – no matter how much or how little credit you have. Late payments will harm your credit rating.

The next most important matter is the amount you owe. If you come close to maxing out on your credit card limit, your score will be dinged even if you always make on time payments. If you can't pay off the entire balance every month, try your darndest to keep the outstanding balance below 50% of your credit limit. It also helps a bit if you have a variety of credit accounts, not just credit cards, since the rating agencies will conclude that you can handle several different kinds of credit. So, department store cards, student loans, and yes, even car loans will help you establish your good credit.

Finally, if you find that your credit balances are creeping up, keep in mind that there's no rule against paying cash for the stuff you need.