A Plan to Build Credit for Young People
Graduation celebrations are coming to an end and now it’s time for college. Perhaps you have big plans to attend a college or university or you may be hoping to earn honors in the college of life. In either case, the future needs to include a plan to build credit.
Educate, Educate, Educate
It would be impossible to design an effective plan to build credit without understanding why it’s important and what you need to do to handle credit responsibly. Not only is learning about credit the first step, it’s the most important.
While some communities offer free credit education programs, the ease with which young people use technology may make free Internet resources more practical. Personal finance courses are provided free of charge by Springboard, a nonprofit agency formed in 1974 with a mission to improve the lives and financial well-being of individuals and families by providing quality financial education and counseling to the general public. Topics available include ‘Understanding your Credit Reports’ and ‘Wise Use of Credit Cards.’ Another resource for learning about credit and demystifying credit scoring and credit reports is offered by FICO, the company that generates the majority of credit scores.
Getting Your Toes Wet
For many young people, a credit card is the easiest way to begin demonstrating their ability to manage a credit account. Look for credit card offers that have a small credit limit to prevent getting over your head and charges reasonable interest rates and no annual fee. Your first card won’t have the best terms but after a time you’ll be given the opportunity to apply for more attractive offers. Note that anyone under 21 will either require a cosigner or be able to prove sufficient income to pay the bill.
Or you can begin by using a secured credit card that works like a debit card except that the activity will be reported to the credit agencies and will help to establish your credit score. With this type of card, the money you’ll be using must be deposited into a special account. Once you’ve shown that you can manage a secured account, the lender will be more inclined to approve you for more traditional credit card offers.
- Make sure you understand the interest rates, fees and terms before using a credit card.
- Maintain a savings account balance that can cover the payments in case of an emergency.
- First timers should avoid trying to manage more than one credit card account at a time.
Maintaining Credit Integrity
Credit management takes commitment and sometimes requires sacrifices. Make every payment on time, even if you have to give up some nonessentials to do so; late or missed payments will damage the credit you’re trying to establish. One easy way to ensure timely payments is to have them automatically deducted from your bank or credit union account.
The most insidious side of credit cards is the ease with which many Americans become overwhelmed with too much debt. To protect against this pitfall, never charge more than 30-40% of your credit card limit. Making the mistake of maxing out a credit card account is often the first step down a slippery slope that is difficult to correct.
By making an honest commitment to responsible credit management, even a single credit card with a small credit limit will go a long way to begin establishing your credit score. The future will be brighter in the sense that the credit you will need to buy a home, car and other major purchases will be easier to secure when your actions show you present little risk to banks and other lenders.
Christopher Arthur is a blogger and regular contributor to www.asapcreditcard.com who writes specifically on financial topics. His primary focus is on credit and debt, but also enjoys sharing tips on frugal living and saving money. He strives to provide educational resources to aide consumers with their finance and money management decisions.