Building Better Credit: Borrowing Wisely to Get Good Debt

Debt can be an albatross if used thoughtlessly, and high debt levels hamper many Americans.

But debt in and of itself is not necessarily a bad thing. It’s how a person uses debt that makes the difference. And smart debt can help a person build good credit.

Younger people, people who have been out of the workforce and haven’t maintained their access to credit, and people in other unique situations may need to build credit. Financial experts offer up a few tips on how to do this.

How’s Today? Is Today Good for You?

Robert Siuty, senior financial consultant at TD Ameritrade, said in general terms, it’s good to start sooner than later, as building credit takes time.

“Most folks get their first credit card in college. Just make sure you don’t overextend yourself. That gets back to budgeting 101: not spending more than you’re making,” he said. “And just being mindful to pay everything on time.”

Rod Griffin, director of public education at credit reporting agency Experian, said it’s usually not difficult to open a credit card account, even if you have zero credit history.

However, if you can’t open a credit account by yourself, an alternative is a secured account, said both Experian’s Griffin and Cheryl Fields, founder of Lifestyle Wealth Group and an advocate for women and finances. A secured account means there is money tied to the account, such as a savings account tied to a credit card. These accounts are a good way to show credit issuers the user has discipline to charge goods and pay them off.

Griffin says the credit card user can make small purchases and immediately pay off the balance to establish a positive payment history with an open, active account. He adds that, to be included in credit scores, an account needs to be open and active for at least three months.

“By paying the balance in full each month, you do not carry any debt, but you do build a positive credit history,” Griffin said.

The Gateway to More Credit Options

By paying on time and being diligent, the user is starting to build a credit history, and an established credit history can help when you’re ready to make larger purchases, such as a car or first home.

And in today’s entrepreneurial culture, more and more young folks are starting their own businesses, which might mean taking out a business loan.

“Once you start to build a little bit of credit, you have options. You can eventually ask for a credit line increase and build from that,” Fields said.

Installment loans, such as for a car, are another way to start building credit, Griffin said, although a new credit user may need a co-signer for some early loans or get a secured account. But again, the longer you maintain positive credit habits, the sooner you might be allowed to go it alone.

Siuty said properly managed installment loans may lead to better finance options in the future.

“As an example, if you can buy a new car and get a zero percent situation, you might be better off borrowing at the zero rate as long as you are responsible enough to make your payments on time. By making timely payments over the course of the loan and eventually paying off the balance, this can help you in the long run to build good credit,” he said.