Build Your Credit Score From Nothing – Part 1

Build Your Credit Score/History from Nothing – Part 1

“Credit Card for Your High Schooler”

Back in 2006 while I was taking a finance class at a local community college, I was informed of the cash-back benefits of having and spending money on a credit card. Therefore, in my normal curious way, I went online and tried to apply for one of these credit cards.
The result? I found out that I had little to no credit history available (and certainly not enough for them to grant me use of a quality credit card). I then began to ask around about the reasons for this. What I found out were essentially three things that I could do (but hadn’t yet at the time) to build my credit score. These three topics will be the centerpiece of the four-part blog series that will follow.
Part 1 – Help Your High-Schooler Build His/Her Credit Score by Getting Them a Credit Card in Their Name
As I mentioned previously, one of the reasons that I did not have any credit history was due to the fact that through high-school and college, I never had a credit card account that I paid off over time. 
What I did have was a credit card with my name on it that was requested as an add-on to my Dad’s credit card account. Because it wasn’t a separate account, it just involved HIS credit history and had nothing to do with me except for me being able to use it since my name was on it. That make sense? Good!
In my opinion, what I should have done in high-school was to apply for a separate credit card/account (in my name) for what’s called a “student credit card.” See the link below for a listing of student credit cards. Essentially, student credit cards are great starter credit cards because they require little to no credit history to sign up, and they start out with low credit limits to reduce the risk of overspending and accruing large amounts of credit card debt.

It should be noted New Federal laws impose restrictions on issuing credit cards to individuals under 21 unless the applicant has the independent ability to repay debt, or has an adult co-signer who agrees to accept joint liability for the account. Having an adult co-signer on the account is OK, as long as it is a separate account, in the teen’s name.


Now that you are convinced of the efficacy of this idea, what’s the best way to go about setting this up for your teen?

1) Go to the link above. Select any one of the credit cards (DO NOT GET A PREPAID DEBIT CARD) that has no annual fee to apply for.

2) Fill out the application for the selected credit card, placing yourself, the parent, as a co-signer if needed.

3) Once you are approved, wait for the credit card to come in the mail.

4) When it comes in the mail, take the opportunity to sit down with your teen and set up his/her online account for them. This is also a great tool to use to teach your child all sorts of personal finance tactics! Explain that the card will not be used for everyday purchases, but instead, to build his/her credit score for the future.

5) Next, since this is a starter credit card, you have two options in my opinion: a) Set up some kind of automatic, recurring payment using the credit card each month, or b) Write yourself and your teen a reminder each month to use the credit card for one or two purchases on a set day.

6) Do not give the credit card to your teen. Place the credit card in your wallet or purse and explain that you will hold on to it for safe-keeping.

Well, that’s it! Not too hard right?! This will give your child a great financial head start on life in no time!

Important Tip – closing credit card accounts hurts your credit score

After you have opened up a student credit card account for your child, used it for some time, and built up a good amount of credit history, you may be tempted to close the account, since you (or your child) really don’t need it any more.

However, closing down the old credit card account will actually lower your credit score in two ways:

  • First, it decreases your credit history, which accounts for 15% of your credit score.
  • Second, it increases your credit utilization rate (% of the total credit available to you that you currently use).

So, the key takeaway here is that if the credit card is no longer used, lock it away in the family safe, check the balance every month or so to make sure no fraudulent activity is occuring, and go about your life!
Keep an eye out for Part 2 of this series coming soon. Please subscribe to my blog feed using the link below to have it sent to you immediately once it is published!

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Keep on learning!

Jacob

Go to – Build Your Credit Score From Nothing – Part 2 – “Pay housing bills in your name”