How to Build Credit When You Don’t Know Where To Start
Life can be quite an adjustment when a child becomes an adult. For the child, and for the parent as well. Sometimes we forget which lessons become important to teach our children as they navigate the world themselves. One of those things is how to build credit, and why it is important to build credit.
We teach our children the importance of saving money, and how to spend money wisely, but what about how to solidify funding for life’s important events and purchases? Kids don’t want to read hundreds of pages just to get the advice they are looking for. They want tips and straight forward advice, so I’m going to give a few tips here that will help them along their way. As well as a few resources for those interested in further researching personal financing and building credit.
Disclosure: I am not a financial guru, but I do have some financial background, and more importantly I have children who are trying to develop these skills now. My daughter said when she was looking up advice on how to develop credit, she had a hard time finding relevant information, so I figured I would advise her, as well as other teenagers facing the same issue.
Tips for those trying to develop credit from the start.
Get a job! You need to establish job security, as well as having an income for the other steps. At this point it doesn’t really matter whether it is full-time or part-time. Just something permanent that offers you more money than the amount that is going out each month. If you are still living at home with your parents, then it will make it easier to establish security.
If you do not have Savings and Checking Accounts, get them set up now.
Establish an emergency fund…putting away $1000 into your savings account for life’s unexpected expenses. If you use money from your fund, replenish it before purchasing any extras.
After about 6 months, if you have met all of the above steps, apply for a “small” credit card, just to start establishing credit. A $500 credit card is enough to help you show your responsibility with payments etc, and low enough that if you go on some spending spree (DON’T DO IT), you won’t do permanent damage. I recommend that you use that card for planned expenses like gas for your car, and every month pay the card in full. This way you are not paying interest on your purchases, and you are developing that credit history. You will have the best luck obtaining the credit card from the same financial institution that you have your savings and checking accounts through. Don’t be tempted to apply for all those credit card offers that you receive in the mail. The more cards you apply for the more it hurts your credit. Basically anytime your credit is being run dings your credit just a little bit, but if you haven’t established credit yet, it is going to do more damage, and those companies are going to be less likely to approve you because you haven’t developed rapport with them like you have your own bank.
Do you have student loans? Even if you are still in college you can pay your loans off early. The sooner you do, the better off you are. My daughter is at this point now in her journey to establishing credit. She had chosen to go to a private college her first semester of school, and it was a $50,000 per year institution (YIKES!). Even with her scholarships and grants she received, she left with around $8,000 worth of student loans. She is still a full-time student, but is back at home taking online classes, and working, so she is starting to pay these down. Her hope is to have her first of 3 loans paid off in November.
Once you have worked towards establishing credit with the credit card, and if you have student loans and are paying on them regularly, your credit should be building quite nicely, and at that point I recommend that you check your credit rating at the very least. You can request a copy of your credit report once a year from each of the credit reporting agencies: TransUnion, Experion, and Equifax. If you find discrepancies on your report, you need to write a letter to dispute them to the agencies. You should do this at least once per year.
At this point you have the knowledge you need to get you on the right path. You should be able to take out a “smallish” auto loan or consumer loan without a co-signer, and in a couple of years be able to have the credit to purchase your first home. Just be sure to maintain a monthly budget so you don’t lose sight of where your money is going. Good luck to you on your journey of financial success!
For more articles on saving money, and budgeting, check out these other posts!