For consumers who are just hitting college age, or even still in high school, building a solid credit history seems like the least of their concerns. But in today’s world, showing that you’re responsible with your money matters more than ever.
Sure, a good credit score will lead to better rates when it’s time to take out a car loan or mortgage. It can, however, also help you rent the apartment of your choice or avoid a substantial prepayment when you set up your utility bill. Many employers even use credit scores when deciding whether to hire job candidates.
Therefore, obtaining a reasonable amount of credit early on and using it responsibly will likely pay off in the long run. Here are some of the best ways to get started.
Become an Authorized User on Your Parent's Card
The most straightforward way to build your credit is by taking out a credit card and paying it down each month. Acquiring a card with reasonable interest rates, however, can be tricky when you have no previous history. Some companies have special cards for college students, but these also have requirements many young people may not yet be able to meet.
Additionally, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 – a.k.a. the CARD Act – made it more difficult for younger Americans to get hold of their own plastic. An applicant younger than 21 years of age has to show that he or she has the financial means to handle their debt or get a parent (or spouse) to co-sign before becoming eligible to get a card. There is one easier way around this conundrum — ask to become an authorized user on your parent’s card.
While this is a common first step into the world of credit, there are some potential hazards to consider. Your credit score will get a boost if your mom or dad pays the bill consistently. Yet if they don’t, your FICO score – the numerical expression of your credit history – will get bruised, just like theirs. Ask if they’re willing to share how much of the outstanding balance they pay off each month and whether they’ve missed any recent payments.
Keep in mind that the primary account holder is responsible for the entire balance, regardless of who incurred the charges. So if you request to become an authorized user, make sure you have a mutual understanding of how much you can spend and what types of purchases you can make with the card.
Use a Secured Credit Card to Stay Within Your Means
There’s always a temptation for young adults to spend beyond their means, and it’s a lot easier to do so when you have your own credit card. A secured credit card helps consumers stay out of trouble. The borrower makes an initial deposit, which acts as collateral for the amount they borrow. Typically, the credit limit on your account is based on how much you put down at the start.
There’s another benefit to secured cards. Once you demonstrate that you can pay your minimum amount due for a period of time, some lenders allow you to "graduate" to an unsecured card. You may want to look for this provision when you apply for the card. But even with these, the CARD Act still applies. So if you’re between the ages of 18 and 21, you’ll probably need to demonstrate your source of income and document your expenses.
Apply for a Store Card
If getting a standard credit card proves difficult, you may want to think about applying for a store credit card, which is generally easier to obtain. You may be stuck with a higher-than-average interest rate, although that won’t matter much if you carry a low balance or pay it in full with each billing cycle.
Often, younger buyers decide to apply for several new credit cards, thinking that a larger amount of available credit will always help their ranking. According to Fair Isaac Corp., which computes FICO scores, this approach often has the opposite effect. Your best bet is taking out one or two of these cards and spending carefully.
Use Your Rent Payments to Build Credit
If reported, the three major credit bureaus will keep tabs on your rent payments. So if you're already renting an apartment, try to get your name on the lease. Then, if you pay the bill on time, you have the opportunity to improve your creditworthiness.
There’s one important caveat: Building owners aren’t required to pass along your payment history to the credit agencies. While larger property management firms frequently do, individual landlords often opt out because of the time and expense involved.
The best thing you can do is ask. If your landlord doesn’t report your activity, you may want to pay your rent through a service such as ClearNow or RentTrack. When you use one of these third parties, you can select to have your rent payments appear on your credit report.
(For more on this topic, read Use Paying Rent to Boost Your Credit Score.)
The Bottom Line
Credit scores can affect numerous aspects of your financial life, from getting better loan terms to securing a job. Building a strong track record takes time, so using credit responsibly from a young age has big advantages.