Teaching Your High School Grad How to Build Credit

Building a solid credit history is essential for anyone who hopes to be able to own property, obtain favorable loan rates, and have more employment options. For young adults, the conundrum has always been that you need credit to build credit, and it is not always available when you’re first starting out. Building credit takes time and requires a conscious effort to manage it effectively.

When building credit, it’s relatively easy to take a step forward and then have one small mistake put you three steps back. The fastest way to build credit is to always be aware of the five credit scoring categories and conduct your credit activities accordingly.

1. Create a solid payment history: Making on-time payments is the biggest credit scoring factor. When you apply for a credit card or a loan, make sure the creditor reports your payments to the credit bureau. When you get a credit card, use it often and pay it off each month to ensure that your report indicates a constant history of payments.
2. Don’t max out your credit: Keep track of your debt-to-credit-limit ratio. To maximize your score, you need to keep that under 30 percent. Zero percent is better. After establishing your payment history, you should be able to obtain additional cards. Your goal shouldn’t be to use more credit but to build up your credit limit while keeping your balances low.
3. Length of credit history: If you’re just starting out, you cannot do much about this. Depending on the type of credit you are trying to obtain, even a six-month history can help build your credit score. However, when you apply for loans, such as a mortgage or a car loan, lenders usually want to see a longer history. Be patient.
4. New credit: Again, not much you can do about this, because all of your credit accounts will be new in the beginning, and eventually they will become mature accounts. Eventually, your credit score will reflect that. The real concern should be when you have mature accounts and the number and frequency of new accounts you obtain.
5. Credit mix: Starting out, you may need to open some credit accounts with finance companies, such as when you buy furniture or appliances on installment plans. While these aren’t considered the crème of the crop in terms of credit quality, they can at least help you establish a payment history. Later, you will want to limit or eliminate the use of this type of credit.

   If you need a student loan for college, it can add to your credit mix. However, private or Parent Plus loans taken out in your parents’ names will not be reported on your credit history. Federal and private student loans taken out in your name will be added to your credit report.

Ways to Start Building Credit

If you start out with no credit, your options for obtaining credit are limited. Here are a few ways you can get started.

Secured credit card: A secured credit card is like a regular credit card in every way except that your credit limit is established with a deposit you make to the bank. If you deposit $300, that becomes your credit limit. When you use your card, your payments are reported to the credit bureau, so you will start building a credit history. With many banks, when you make 12 to 24 months of on-time payments, your secured card can be converted to a regular credit card. You should only use your secured credit card to pay for things you have budgeted for and then pay the balance in full each month.

Authorized user: Another way to start building a credit history is by having your parents add you as an authorized user to one of their credit card accounts. Most banks will report your payments separately as if it were your own account. Some banks don’t report authorized user payments separately, so you need to verify with the bank that it does.

Retail account: For many young adults, their first credit account is a retail account. Retailers are more inclined to issue credit cards to people with no credit, but the credit limits on the cards are typically very low, in the range of $200 to $500. Also, the interest rates charged on retail credit cards are usually very high, so you should only use it if you can afford to pay the balance in full each month.

Establishing credit is one of the most essential things you can do to build a strong financial foundation. Follow these steps and always remain conscious of how you are using your credit to ensure a high credit score.