Establishing a Good Credit Score
Living in America it is based on a system of borrowing. We always promote that you should control of your debt because it prevents saving and investing. With that being said, it is important to establish credit for when you need to borrow especially as you get older when buying a house when with consumer loans such as a boat or car. Having a good credit score simply means that you will be offered the most lower interest rates to borrow money.
Now before we start, not everyone has a credit score. If you do not have a credit account or have opened account with lenders such as an auto loan or lease and they do not report the payment status to a credit reporting company, you may not have much of a credit report.
What is a Credit Score?
-It is a way of summarizing all the accounts in a credit report
-Credit reports contain information regarding collections (failing to make payments that are owed) or sued for amounts owed.
The Basics of Using a Credit Cards
There will be a day when you want to buy things with your own money and establishing a good credit score is extremely important as soon as you can to be ready for the bigger purchases.
For example, we worked with a colleague who was 26 and she did not have a credit card. She had no credit history other than a car payment with her mom as a co-signer. We eventually guided her into getting a credit card to build a credit score. She admitted that her parents had never given her any direction on this subject.
How to Establish Credit for Young Adults
Legally, you cannot apply for a credit card until you turn 18; however, you can be under this age as an authorized signer on your parents. Becoming an authorized user does help a credit score to a degree; however, it is not as robust as being a primary cold holder.
On the other hand, when you do turn 18 and you don’t have solid income, then this is a situation where the parent may need to cosign on the card.
Responsibilities of Ownig a Cedit Card
1) If you're working, even a part-time job, a cosigner may not be necessary. If you require a cosigner this means that person will be responsible make the payments on the card. This can also apply when a parent or guardian cosigns for an auto loan or leased vehicle.
2) It is important as the young adult that you are ready for the responsibility to manage a credit card. Therefore, teaching some basic budget skills is very important.
3) If you can make an agreement with a parent or guardian to cosign and if you manage the payments, this usually creates good budget habits meaning, you'll tend to keep a closer eye on eating out and buying coffee etc.
Other Ways to Establish Credit
Without a cosigner there are other ways to establish credit to get you started:
Secured Credit Card
A secured credit card is backed by a cash deposit you make when you open the account. The deposit is usually equal to your credit limit. For example, depositing $200 means there is a $200 limit. Then you can add more money as needed.
Unsecured Credit Cards
This type of card gives you a credit line based on your creditworthiness. Typically, there are no penalties or hidden fees. More than likely you will need some credit history which goes back to the value of having a cosinger on another credit card.
Credit Builder Loans
They also go by names such as "Fresh Start Loans" or "Starting Over Loans." They are not widely known and they are usually offered by smaller financial institutions.
Good Budget Habits
So, this sounds like a plan; however, if you obtain a standard-type credit card, this is where budgeting is very important. First and foremost, it is important that all charges placed on the card in the prior month are paid off during each billing cycle.
When you do not pay a card off in full, this where interest accumulates meaning you'll pay additional money on top of your balance. As a rule, you should never make charges on a card unless you can pay them off within 30 days. If this occurs this means that you can't afford what your buying.
A good way to prevent blowing money without oversight is to put a very small credit limit on the card. Once that limit is reached you can no longer make charges until a payment is made on the card.
What is Considered a Good Credit Score
According to Equifax, the ranges vary depending on the credit scoring model; however, generally credit scores from:
-580 to 669 are considered fair
-670 to 739 are considered good
-740 to 799 are considered very good
-800 and up are considered excellent
It does not take long to establish a good credit score; however, other factors that allow for bigger purchases are longevity / credit history. In addition, it is important to refrain from opening several accounts. (A few cards will do the trick) This can have a negative effect on your score. Lastly, make sure that you do not miss payments - this a strict "no-no."
To wrap things up, make sure that you can handle the responsibility of managing a credit card. The two most important items are to create a budget and pay your balance in full. Set up automatic payments and you will be covered.
To learn more about establishing credit click to listen to the podcast or read the blog transcript.