Why Building Credit in Your Teens is Crucial in Your 20’s

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The following is a guest post written by Jason Bushey. Enjoy! 
Like most 20-somethings, I’ve learned my fair share of lessons the hard way while adjusting to the scary post-college existence that is the “Real World”. Of these, few have had as much of an impact as the experience I endured while applying for a car loan.
For those of you that want to skip the end, I’ll leave you with this: You should start building credit as early as you can, because your credit history will be absolutely crucial when applying for a loan in your 20’s.
Now, if you’d like to know the whole story (and how you can avoid the same mistakes I made), I’ll start from the beginning…
I’ve actually had a credit card in my account since I was 19. I was at home during Winter Break one semester when my Dad told me it was finally time to start building credit in my own name. So, when a student card offer came in the mail with my name on the envelope, I filled out the application, snail mailed it in, and in a couple of weeks I had a credit card with a $250 credit line in my back pocket, collecting dust.
OK, I made a few purchases on the card – including a pair of concert tickets that were a little out of my price range – but by and large I wasn’t racking up a ton of credit history in my name. (Unbeknownst to me, since I really didn’t have a clue about finances in college. Who needs to learn about money when you don’t have any, right? … Wrong.)
So, fast forward to a few years later; I had graduated college, moved out to the west coast sans car and was in the market for some new wheels. I had enough for a down payment and what I thought was a pretty reasonable monthly payment, but – and this is a theme in this story – I was wrong.
As it turns out, having a great credit score (which I had) isn’t always enough to get you a loan in the post-Great Recession world of lending, nor is having a job (which I did, albeit with an entry level income) and references.
What is important, however, is credit history. And, mine was extremely limited, as I would come to find out.
So, after getting not one but two loans denied after finding a car in my price range, I had to hit up my Dad (there he is again) to co-sign. So much for being independent…
However, at the 11th hour and after dealing with a handful of banks, car dealerships and salesmen – my worst nightmare, really – my local credit union stepped in and approved me for a loan with reasonable interest (thanks to my credit score) and a low monthly payment. No co-signer needed.
The lesson? (Other than the fact that credit unions are awesome.) Building a strong credit history is extremely important when you’re young, and will have a huge factor on whether or not you’ll be approved for a loan in your 20’s.
So, if you want to avoid the hassle and headaches that I endured, here are a few tips on building your credit in your teens and college years as you prepare for post-grad life in the dreaded real world…

Apply for a credit card early

Since the 2009 Credit CARD Act passed, it’s been a little trickier for under-21-year-olds to get approved for a credit card on their own. However, the earlier you apply for a credit card in your name, the better.
That being said, make sure you (or your son or daughter) are responsible enough with your finances to own a credit card. You don’t need me to tell you that not everyone is fit to own a credit card, and according to the credit bureau, TransUnion, the average consumer carried close to $5,000 in credit debt in Quarter 3 of 2012.
One way to alleviate this issue is to start you or your kids with a prepaid debit card. It gets a consumer-in-training in the habit of spending only what they can afford, and works as a great “training card” before applying for the real deal.

Use your credit card responsibly and make on-time payments

Another thing I learned late in the game is that a dormant credit card account only improves your credit score for so long. Creditors want to see you using that shiny new credit card. Otherwise, competing lenders will have little interest in supplying you with credit down the line. (And that’s more or less what your credit score is all about – how appealing you are in the eyes of lenders.)
Set aside a few everyday items for credit card use each month, don’t splurge on expensive items and keep your balance low so that each month, paying your credit card bill on time is a non-issue.
Speaking of on-time payments, the number one way you can improve your credit score when you’re young is by making on-time payments each and every month. It’s that simple.
Seriously, nothing kills a credit score like a missed payment. Make paying your credit card bill your number one priority when it comes to personal finances when you’re young and you’ll be on the road to a great credit score and credit history in your 20’s. Finally…

Piggyback your parents’ accounts

Many consumers aren’t aware that when they add an authorized user to a credit card account, that user can then piggyback the credit accrued by that very same account moving forward. This is another easy way to build credit when you’re young, and can make for an excellent second credit account especially.
Sure, the conversation might sound a little strange at first: “Good to see you, Mom and Dad! Now can you please add me to your credit card account?” But, if you explain the benefits and the lack of risks involved with piggybacking an account (as long as they’re in good standing, you’re in good standing), then hopefully they’ll oblige to let you in on their good credit.
Stick to these simple steps and odds are on you’ll have a lot less trouble applying for a loan in your 20’s than I did.

How about you all? What age were you when you started to build your credit history? Do you wish you started earlier?  

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/glynlowe/7374460750/sizes/l/in/photostream/

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