Penny Wise: Savings account helps establish credit

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A secured credit card can be the first step.

By Neven Jones

Before establishing credit, students should open a savings account whether they are working or receiving financial aid, a senior financial sales adviser at BBVA Compass Bank, said.

The savings will help pay rent, fix a flat tire or cover other emergencies, she said.

A good way to establish credit is to obtain a secured credit card, she said.

Money must first be put aside in a savings account.

The account is frozen and the secured credit card is issued against the money in the account, she said.

The savings account is used as a “security deposit,” she said.

Banks may charge a small fee for the card.

Even though the credit card is secured, banks will still report to credit bureaus if payments are late or on time, she said.

A good rule of thumb is to use about 30 percent of the available balance, then pay it back on time, she said.

After about a year, students can graduate to a regular unsecured credit card, she said.

Students who use debit cards should be aware they do not establish credit.

They are a convenient way to access checking accounts instead of using checks, she said.

“The sooner you start building credit, the better off you will be,” she said.

If students wait too long to establish credit, they may be forced to pay the maximum interest rates when trying to get a loan, she said.

After graduating, many students will be ready to buy a car, move out of their parents’ house or the dorm and will need good credit, she said.

Having no credit is slightly better than bad credit; negative marks can stay on a credit report for two years or more depending on the creditor, she said.

The adviser recommends checking credit scores on a free website such as www.annualcreditreport.com. Do not pay for your credit score, she advised.

There are many scams that will charge a credit card, she said.

Permission from the company to use the adviser’s name was not obtained by press time.

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