This question comes from a reader: How can my son build his credit history if no one will give him credit in the first place?
It’s an excellent question, and one I receive frequently. Fortunately, building credit from scratch is not as daunting as it seems, though it’s prudent to be prepared for some bumps along the way.
Getting started on building an early credit history as a teen or young 20-something is absolutely worth doing. A longer history of good credit decisions can mean the difference between a low or high interest rate on a car loan, a starter home, and even make a difference on whether a deposit is required for connecting utilities.
There’s one caveat: Make sure your son or daughter is doing a responsible job managing a debit card or cold, hard cash before they’re turned loose into true plastic adulthood.
Moreover, make sure they understand what a credit score consists of and why it’s hard to build it if you don’t have any bills in your name. A credit score estimates your creditworthiness with a three-digit numerical value. A perfect credit score is an 850.
The most widely used credit scoring system on the market is the FICO system, which was created by the Fair Isaac Corporation. If you’re building your credit worthiness from the ground up, one of the best ways to do so is with a secured credit card, which is backed by a cash deposit you make upfront. The deposit amount is usually the same as your credit limit. You’ll receive the deposit back when you close the account.
“This is scary territory, but a good learning opportunity,” said Jamie Bosse, a financial planner with Aspyre Wealth Partners in the Kansas City area.
Many financial institutions offer secured credit cards for building up credit. Choose one with a low annual fee and make sure it reports your bill-paying history to the three main credit bureaus — Equifax, Experian and TransUnion.
Another approach: be added as an authorized user to a parent’s card. Doing so adds the card’s payment history to your credit file. “You don’t have to use the credit card in order to benefit from being an authorized user,” according to a Nerd wallet report.
Several other strategies can help your child jumpstart a credit history, such as student loans or car loans in the child’s name. If your child is living in an apartment, have the bills set up in their name for rent, utilities, and insurance. The same with the cell phone.
Services like RentTrack, an online rent payment program, allow you to build credit by making payments on time. Check with your apartment property manager if they offer this payment service.
Experian Boost offers a way to have a cell phone and utility bills reflected in your credit report, but only with Experian (For details, visit www.experian.com.).
Of course, you won’t build a good credit history if you don’t pay your bills in full and on time. So, make sure your teens develop good spending habits as they learn to use and manage credit.
(Article written by Steve Rosen)