“Starting a Credit File for Youngsters” (legal age I mean) can be your ticket to free or deeply discounted travel for the rest of your life. Doing this properly, slowly and with a plan, will provide you the credit history you need for later large purchases. Today, with all the big bonuses out there, we should get you all off on the right foot. These suggestions will be for those with a very limited or no credit file whatsoever. Here is where you start.
There are four types of credit that are reported on a personal credit report:
- Retail Charge Cards and Open Accounts
- Installment loans
- Credit cards
- Real Estate Loans or Mortgages
A well rounded credit file has some of each of these types of credit. We’ll work with the first three for now.
The purpose of this undertaking is to convince lenders and grantors of credit you are responsible enough to manage the money they loan you and repay them on time within the terms and conditions of their lending agreement. You newbies will be working with the first three while establishing your credit file. We want you to have at least one of each type of credit in your credit file. I’ll give you the three easiest ways to accomplish that goal.
From my past history in mortgage banking, you’ll know you’ve been successful when you can apply for a credit card and be approved, borrow for a car, are able to buy your own home or condo with a real estate loan or mortgage. That is still the American Dream for many of us. (As a side note, I paid off my mortgage years ago and my credit scores suffer from it. Not much, but it would be a higher score if I had an open mortgage account.)
- Charge cards as you know them, typically come from retail stores, or as more experienced card applicants know, there are also charge cards available from American Express and others. True charge cards are considered open accounts and require the balance be paid in full each month. There is no carrying a balance and paying interest of these cards. The higher end charge cards from American Express are not for you yet. They are used for convenience and record keeping for more experienced customers. Your time will come.
- Retail charge cards come from your favorite retailer. Some do allow you to pay the balance over time. Our new young readers should consider opening a charge card with their favorite clothing retailer, JC Penny’s, Old Navy, Macy’s, Banana Republic, LL Bean etc. At many store locations you will be offered the opportunity when checking out to open a charge card and will even be offered a discount on your day’s purchase for doing so. This may be your first venture into the world of credit and the decision is not to be taken lightly. Somebody is giving you merchandise and agreeing to let you pay for it later. Your word is your bond. You MUST pay as agreed. If your entire balance is due within a one month period, only open the account and use the card if you actually have the money on hand to pay for the items you are charging. If the retail charge card allows you to make monthly payments (similar to a real credit card) you are still better off having the money on hand to cover the cost of your purchase. Remember these exercises are designed to help you establish a credit rating or file, not to start spending money you don’t have. One mistake early on will cost you years of grief and aggravation. Doing this correctly will benefit you forever in terms of larger purchases you need to make and free travel opportunities for your lifetime.
- These store retail cards are the easiest types of credit to obtain, and most do reflect on your credit report. Ask when at the retailer if their credit card reports to the three major credit reporting agencies. If they say no, make your needed purchase from a retailer that does report activity on their card to the agencies. Use the charge card for items you need and pay the bill promptly when it arrives at your home or on your computer by using online statements. Never even one day late. Allow more than enough time for the mail to reach your creditor. Your payment due date is NOT the day you mail the payment. It must be credited to your account by the due date. You made a promise to pay on time. Do so for several months running. You are now opening your credit file. Your timeliness of payments will be reported to the three major credit reporting agencies, Experian, Transunion and Equifax. You will have a trade line on your credit report.
A Tip for you Youngsters: You are now responsible to let people know when you move. If you move, you must now start telling your creditors. Don’t forget it.
If the charge card does allow you to pay over time, consider making a payment larger than the minimum payment but not paid in full. Yes, this will cost you interest but with a small purchase of $50-$100 paid over say 6 months, the interest in minimal when compared to your ultimate benefit. This shows the credit grantor you can be trusted to live up to your obligations even more. Pay more than the minimum required each month and get the account to less than 50% of your credit limit as quickly as you can.
Once you have this account in place and are paying ON TIME, you should consider the next type of account, an installment loan which we will cover tomorrow.
“Your Credit is One of Your Most Important Assets.”