One of the first steps to true independence is developing a strong sense of financial responsibility. The moment you start earning any money at all is the ideal moment to learn about money management, budgeting, and the importance of good credit. Whether you are exploring financial independence for the first time, or looking to re-build after a few credit mistakes, here are some options for getting on a path to a solid credit history.
Become an Authorized User
As an authorized user, you’ll be issued a credit card that is linked to your parents’ account. The idea behind this type of credit card is that it gives the user the opportunity to understand how credit cards work in real world terms, while still under the watchful eye of a parent. Additionally, if the bank reports account information for authorized users, the parent’s account information may be incorporated into your (the minor’s) credit report. The card is best used temporarily until you are either old enough or have enough credit history or income to get your own credit card.
Apply for a Secured Credit Card
You may also consider applying for a secured credit card. Beware that these cards can come with higher fees than unsecured cards, but there are some advantages to using them. They are backed by the funds you currently have available in the bank, so if a charge on your secured card is greater than the money backing it, it simply will not go through. This safeguard can be useful for someone “learning the ropes” of credit building, and it provides you with the opportunity to gain some experience of paying bills on time with relatively low risk. Try setting a monthly reminder on your phone or computer to get used to paying a monthly bill. By using your secured card responsibly, you can build your credit, as well as the skills and habits required to maintain good credit.
Apply With Caution
Once you are comfortable paying monthly bills, you may choose to apply for an unsecured card. As the name suggests, an unsecured card differs from a secured one in that a borrower’s spending is not limited by their current assets. Managing an unsecured card responsibly is one of the most common ways to build credit. But, be cautious about which card you apply for and do not apply for several at once. Too many accounts can have a negative impact on credit health. Select just one card that is right for you by considering the benefits such as: a lower interest rate, no annual fees, reasonable credit limits and clear billing policies.
The most important thing to remember about using credit cards is to pay on time, and pay more than the minimum. Always. Set up reminders on your phone or through online banking, or enroll in automatic payments to avoid delinquency. Try to avoid any big purchases when you are starting out or rebuilding, and use only a small percentage of the credit limit. Ideally, you should only spend what you can pay off each month. A credit card should not be considered a license to live beyond your means! Use the card regularly since it can be closed for inactivity. Put small recurring, regular expenses on it like groceries, or gasoline, and aim to keep the charges below 30% of your credit limit.
Beyond Credit Cards
Building good credit is not just about credit cards. Any bills that you can pay in full and on time with consistency will help build credit. Payment of utilities, rent, cable, taxes and even library fees can impact credit history. Use caution with student loans and borrow only what you need to go to school. Avoid using them to fund your lifestyle which causes balances to get out of control!
As you continue to build credit, it is important to monitor your progress. Everyone is entitled to one free credit report per year. You can request the report by visiting annualcreditreport.com. Scan your credit report to see where you can cut back on spending, and to check for unusual activity. Since your credit score is calculated using the information in this report, monitoring it is an important part of good credit maintenance. Reviewing the report regularly can help protect you from harmful occurrences such as inaccurate transactions and identity theft.
Written By Kevin Lowe