Is it Expensive to Build Credit?

Building credit doesn’t have to cost you money. In fact you can save money in the process.

There are two kinds of goods that we buy: consumer goods and durable goods. Consumer goods are used up shortly after purchase. Durable goods are used over a matter of years. In the vast majority of cases durable goods are more expensive, and you need to borrow to get them.

Some goods are nearly always bought with credit. Real estate is the perfect example. When was the last time that you heard of someone buying a house with cash? It’s so rare that too much equity in a first home purchase is flag for the bank to check for money laundering. New cars and business start-up expenses are usually financed, too.

Consumer goods, however, can be bought with cash or credit. If you’re thrifty, you’ll save up the money for a purchase rather than racking up a balance on your credit cards. Paying with cash keeps you on budget, saving on interest charges and reducing your stress.

Until you go to buy a car or a house. Then they will tell you that you have no “credit history” and can’t be certain that you’ll be responsible with borrowed money. It is a truly cruel twist that the thrifty in America are not allowed to borrow money.

It is an urban myth that in order to build credit you need to pay interest. This is not correct. All you need to do is borrow money on a regular basis and pay it back. Here are some really good options for building credit.

A savings-backed credit card

This works buy you placing money into a savings account and then the bank issuing you a credit card with the same amount. You are welcome to pay off the credit card during the grace period every month. The only “cost” of this is the small interest on the bank account as opposed to other investments. For instance, a bond might pay 4% on $500, while a savings account might pay 1%. The bond interest is $20 a year, the savings interest is $5. Unless you’re twelve it’s not a very big difference.

Buy something on credit that will save you money

Suppose you’ve been saving up for a new TV. Your old one isn’t bad, but it looks pathetic in your apartment. Yet what you want is still a year or two of saving away. Then you see it: a close-out sale! True, you’ll have to borrow to get it, perhaps even get a co-signer. But the price is low enough to offset the interest cost. Buy it and use past savings to help make the payments. It’s a win-win.

I know one girl who needed to build credit. Rather than join a gym that she didn’t have time to go to, she financed a treadmill instead. At the end of the year she had good credit and a fully paid-for treadmill for the price of the gym membership.

Deferred Student Loans

Where is it written that you have to spend money that you borrow as a student loan? Well, maybe it’s implied. Suppose, however, that you have a job that will pay most of your bills in college. Take a deferred loan out anyway. It will cost you nothing until you get out of school. Use the money to secure other debt or prepay rent at a discount and then save the money in your budget. Then, when you get out of school pay the loan off at no cost to yourself.

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