The Importance of Establishing Credit

credit cardsIn order to borrow money for something big and important like a house, you must first demonstrate that you are “credit worthy“.  You must show that you are ready, willing and able to repay smaller debts before you will be allowed to take on a large one, such as a mortgage. And you have to have a track record of doing it so that banks will consider you a good credit risk.

This is a tricky balancing act.  While it’s well known that many credit card companies solicit college students with easy-money offers and it’s very tempting for young people to get into financial trouble that way, it’s less known that the other extreme of going many years without buying on credit can also be harmful.  Why is that? Because you won’t be able to get credit when you need it if you don’t have a history of using it responsibly.

Many of us have been raised to avoid credit cards, car payments, student loans and the like.  But if you have none of them, you will not be able to qualify for a home mortgage, either.

The best path is often the middle way, and that’s the case here too.  Building credit is a positive thing but requires caution.  The right time for credit cards or small debts is when you can use them responsibly (meaning: hardly at all) and pay them off monthly.  Age 18 might be too young, but age 30 is likely a bit late to dive into this pool of credit!  (more…)