Building a Solid Credit History out of Nothing
How to build a solid credit score out of nothing is a problem that has plagued teenagers and young adults for generations. To most banks and credit card companies, you are invisible until you have a credit rating. It is like you are a non-person. There are three traditional ways to building up your credit score for the first time and each of them has their own plusses and minuses. Let’s take a closer look at this problem and what can be done about it.
The safest and most popular step for many young adults is to piggy back on the cards that mom and dad use. This is a logical approach since the teen is protected if they happen to go overboard. Mommy and Daddy will be right there to bail them out. But you need to be careful. When you call your credit card company to list junior as an authorized user, you need to ask if the card company will report card usage to your son or daughters credit score or if it will only be reported to mom’s and dad’s. If your credit card company doesn’t report credit to third-party users on your account, then you are wasting your time. Junior can still learn about how cards work, and what the consequences of using a card irresponsibly are, but he won’t build his own credit.
The next option is for junior to get his own card entirely. He has two main options. The first is to get a student card. This is an unsecured credit card that works exactly like any other card. Since it is a student card, it will most likely have a higher than normal interest rate and a lower than normal credit limit. The card companies that offer the student cards feel obligated to offer a high interest rate to protect themselves from the likely scenario of defaults among inexperienced card users. These student cards are a great way for your teenager to learn about credit and for them to build a positive credit future. But be warned, this knife cuts both ways. You can start your credit off on the wrong foot by missing payments and defaulting on your card. While it isn’t impossible to recover from early credit mishaps, its not something you want to have to worry about.
A final option that many folks take is called a secured credit card. A secured card is a credit card that requires users to put a down payment on the card. If your credit limit on your secured card is $500, you will not be able to use the card until you have made a down payment for that amount. To say that secured cards are a hassle is an understatement, but they are also fairly easy to get, even with no credit. The credit card company feels protected because they have a deposit and your son or daughter gets the chance to build their credit from nothing, so they really are a win-win situation. And in no time, usually within a year, your son or daughter will be moved up to a regular, unsecured card or they will receive an offer for a card like that in the mail. Establishing good credit doesn’t take a lot of time, and once you do, it can be the gift that keeps on giving for years to come.