Learn To Build and Manage Your Credit, While You’re Young
Everyone tells you that these are the best years of your life. But the rest of your life can be even better if you start building credit now and working on your debt planning. Next time you try to rent an apartment, ask for a loan, or apply for a job, you’d do well to come armed with the same information that your creditors already know about you.
Here are the raw stats:
Every business reports your financial management activities to the three major credit bureaus—Experian, TransUnion, Equifax. Your financial activities dictate your FICO (Fair Isaac Corporation) score, ranging from 300 (worst) to 850 (best), and this is what lenders, landlords and employers use to determine your credit risk. The lower the score the more likely you’ll be considered a risk. It also dictates interest rates. A low score can mean thousands more in interest payments, as you can see in this table:
Here’s how FICO scores affect rates based on a 3-year auto loan for $15,000.*
| FICO Score | APR | Monthly Payment |
|---|---|---|
| 720-850 | 6.948% | $463 |
| 690-719 | 7.779% | $469 |
| 660-689 | 9.250% | $479 |
| 620-659 | 10.692% | $489 |
| 590-619 | 13.988% | $513 |
| 500-589 | 14.785% | $518 |
*from myfico.com
Your credit history can haunt you for the rest of your life so it’s a good idea to follow this easy three-step-plan to build, maintain and (if you must) repair your credit.
#1 Build Your Credit
Open Checking/Savings Accounts: You can open an account for as little as $10 at some banks. The ability to maintain your accounts will show lenders that you can reliably handle money. Opening an account is particularly beneficial for those who haven’t already established credit. Bounced checks mess up your credit report, so use that check-writing feature wisely!
Apply for a credit card: Part of your debt planning should include determining what type of credit cards you should sign up for. Get a credit card with low interest rates (not just intro rates), no annual fees, and a generous grace period. Try not to carry a balance so you don’t end up paying interest. Retailer cards are easy to get but have high interest and worse penalties, so only get one if you’re able to pay in full each month. Secured cards require a deposit, which becomes your limit. Be careful about missed payments as they come out of that deposit. Be aware that secured cards also have high interest rates.
Don’t get lots of credit at once: When you get credit, it goes on your report so if you open many accounts at once, they drag down scores and worry lenders. Even applications stay on your report for two years. If you need more than one card, wait six months before opening another. Wise financial management practices dictate that you use your first card responsibly, especially during the first six months; doing so will allow you to get better rates on future cards.
Piggyback on someone’s credit: If family members with established credit add you to their credit cards, your credit will reflect upon theirs. Conversely, so-so or bad credit from your family members may be something you’ll inherit as well, if you sign on as additional members and users of their credit cards. Also, if they co-sign a loan with you and you default, you’ll be impacting their credit, so be careful.
#2 Maintain Your Credit
Get Your Credit Report: Use annualcreditreport.com to get all three reports once a year for free. If you find mistakes, immediately contact the credit agencies since discrepancies stay until you take care of them. If your report is bad due to debt, start working on repairing your report. Avoid companies that offer to fix your credit: many are reputed to be rip-offs and have been reported to use illegal practices. The only way to improve credit is to pay debts and dispute false charges.
Mint Tip: If there are unauthorized charges and you suspect identity theft, immediately visit the Federal Trade Commission Identity Theft Site.
Get Your Credit Score: Although you can receive credit reports for free, it’s not typically the case with credit scores. Credit scores cost $15.95 at annualcreditreport.com or myfico.com. Cheaper sites calculate their own scores, and are often inaccurate. Just like credit reports, you have three scores. Check all of them if you’re making a major purchase. You don’t want to get caught off guard if the lender checks one that you weren’t able to review beforehand. Recently, a new service called CreditKarma.com was launched to provide free credit scores to the public. The downside? You’ll have to supply your personal information to this new company before you’re able to review your scores.
Don’t close old accounts: Once you’ve paid off your credit card accounts, don’t close them off! Older accounts will show that you have long-lasting credit history, and this will indicate that you have financial stability. If you close your available credit, it’ll raise your debt-to-credit ratio.
#3 Repair Your Credit
Pay in full every month: If you carry a balance, you’ll pay interest. If you’re unable to pay in full, pay at least the minimum on all debts. Paying at least the minimum will improve your credit history and score, which will give you leverage for lowering your interest rates.
Pay on time: Late payments mess up your report for years. It can also raise interest rates. Any late payments you make on any one bill will affect the interest rates you have across all your credit accounts. If you have trouble remembering due dates, have Mint remind you when bills are due and set up auto-bill pay online through your bank.
Lower your debt-to-credit ratio: Your debt-to-credit-ratio is what you owe versus how much credit you have. If you owe $5,000 and have $10,000 in credit, your ratio is 50%. The lower the ratio, the better. Aim for a ratio that’s less than 30%. A quick way to lower it is to increase your credit line; but, don’t spend more just because you happen to acquire more credit.
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How about saving up and paying cash then you don’t have to worry about interest rates. Why was that left off this list?
Aren’t checking account reports separate from a credit report? Bounced checks and excessive NSFs will be reflected on that separate report and affect your ability to open a checking account elsewhere in the future, but will not affect your credit score negatively.
Hey @Steve, though I definitely agree with your reasoning about paying cash, there are lots of good reasons to generate a credit score.
Most people will incur some form of debt throughout their lifetime. Whether it be a mortgage, an education loan or even a business loan (almost every successful business has incurred debt during its lifetime). Most people simply don’t have the money to pay for a home or an education in full, and they’re not really expected to either.
In particular, the advice above is generally easy to follow and you can start to generate credit-worthiness using a small credit card that won’t “break the bank”. You can honestly pay for everything “in cash” (i.e.: pay off the card each month) and still generate a respectable score.
You can definitely go your whole life without needing any form of credit, but this is the exception not the rule.
This is a good article for young and older people to read.
And saving as noted by Steve is also important. in fact if you cannot
Sacrifice and save money you cannot be successful financially.
A simple way to teach children or young adults to save is by taking a percentage
Of what they earn, and save it for them.
For adults, start at the source, your paycheck.
If you are like most folks, your paycheck stands for money in the bank!
Make use of automated payroll deduction through your financial organization, which automatically transfers a designated sum of money from your paycheck into a separate savings account
I will say it before and I will say it again. I wish I had been taught about financial management when I was in high school, even before I made any money. Yea we had classes back then about saving money, but what should really be emphasized at an early age are aspects like, student loans, credit cards, personal management, and compounding interest! It is never to early to be exposed to the idea of retirement and long term investment growth!
this is helpful, but i’d love it if Mint could suggest credit cards for building credit. because i still havent found a credit card that doesnt require an annual fee and low interest and i’m constantly being turned down on applications, even Macy’s turned me down lol. though its not because of bad credit, its cuz of very little credit history.
Nothing really groundbreaking here.
Well start young was the key to control and manage your credit. But also can be apply for almost eveything. For an example, US gov take this action :
http://insurancelog.blogspot.com/2008/09/financial-campaign-by-us-gov.html
There is ‘good credit’ and ‘bad credit’. The quicker we learn this and instruct our youth regarding this the better. The crisis we have in the financial system right now is due in part to the mentality of “I can have what I want”… a war, a house, a new car, and worry about paying for it later. Later always cost more and the debt keeps growing. Debt, unless it is incurred to pay for income producing assets will always cost more in the long term.