Of all the subjects that high schools and colleges teach their students as general education courses, the concept of money management and maintaining a solid credit rating does not come up often enough. While many young adults want to avoid topics like these, it is important for this message to be received: having good credit is essential to your future. A credit rating is easy to build, easier to ruin, and a major headache to fix.
Once a credit score is damaged, consumers are going to have a very tough time rebounding. It can take years to repair the mistakes we make as a young adult. A small purchase left unpaid can spiral out of control. Even worse, a large purchase could balloon to the point where buyers can barely afford to make the minimum payment. That is why it is important to take smart steps.
As noted by Experian, credit is a pivotal player in many facets of our lives. Many of you may already know that credit scores impact one’s ability to buy a home, automobile, and other things many consider to be essentials. Renting an apartment could become an ordeal. How about credit cards themselves? If someone does not have a credible credit rating in place by the time they have graduated college, it can be hard to obtain a credit card from the top companies like American Express, MasterCard and Visa. Even the less popular cards will be hesitant to issue you any form of credit. Just like you, they have to be smart about this process.
If you are able to obtain a credit card at this point, then you run a significant chance of paying an incredibly high APR with a very low minimum. This is an undesirable combination for credit card holders. So, how best to avoid that kind of situation? Thankfully, just a few simple steps are required of those looking to build credit, making it easy to be on the way to an established line of credit before your name is called at convocation.
1. Get Your Own Credit Card
A few years ago, you could expect a deluge of credit card applications from virtually every company in the business the moment you began school. In the wake of the Credit CARD Act, all Americans under the age of 21 need to either show proof of independent income or have a co-signer to be approved for a credit card. This has led many companies to push debit cards in lieu of the traditional credit card. However, if you can show that your are financially independent or able to have a co-signer you can be on your way to achieving the first step the credit line process before you are 21.
An alternate option would be obtaining a secured card, which essentially acts as a debit card. As Time Business & Money states, "A bank will give just about anyone a credit card if they put up a deposit of, say, $300, which then becomes the credit limit." It’s a bit like taking care of an egg in order to prove to your parents that you can handle raising a puppy. Those who can take manage a secured card for a year or so are well on their way to their own full credit card.
If this option doesn't work or is unappealing, it’s also possible to get a gas or department store card. Be very careful, as these cards usually come with high annual percentage rates. Just remember that the first card that is offered is not always the best option. Make sure to get a card that allows ease of purchase without a sky-high APR. Once you have obtained the right card for you, you're on to the next step towards a stress-free credit rating.
2. Make Smart, Small Purchases
High APR will probably be the norm for almost anyone who is just starting out in pursuit of building credit. This means that interest can quickly build if purchases are not paid off in a short window of time. To limit the chances of this happening, it’s a good idea to stick to making smart purchases that can be paid off at the end of the month. Sure, a bunch of money at your disposal seems like a great new luxury for those rushing into adulthood, but the idea that heavy credit use is good is a trap that should be avoided.
Purchasing computers, video games, or any number of other personal luxuries might seem like a great idea for those looking to enhance their college experience. On the face of it, it would be feel great to upgrade that Playstation 3 to a 4, but it’s unfortunately a move that can lead to a tricky credit situation in the long run.
It's the essentials that should be put on your card. Tired of eating ramen noodles and the same bland "artisan" sandwich your student center is offering? For around $60 to $100 dollars, it’s possible to stock an apartment with supplies for a few weeks – provided the buyer makes smart choices in the grocery aisle.
For those who are set for food, school books are always an option. Any college student or parent can tell you that school books are priced at seemingly ridiculous premiums. No one wants to shell out their hard earned cash for a history text that will likely remain untouched, but with a credit card it’s possible to buy those books up and use them to help build credit. While it's recommended to only purchase what can easily be paid off at the end of the month, books may take a month or two. That will be covered in the next step.
Lastly, those who are covered for books and groceries should feel comfortable spending their money on small, easily repayable luxuries. Go on a small date, or purchase some snacks for a night out with friends. Just remember to keep it small and smart.
3. Pay Off That Debt
Again, you should really only purchase what you can pay off by the end of the month. When a bill comes, pay it in full and you are making your first step to establishing a strong credit score. However, sometimes circumstance necessitates making a purchase that just can't be paid off in a month.
Sometimes those college jobs don't pay all that well, or a book’s price is too high to afford to pay off right away. In situations like that, it’s okay to pay a larger purchase off in installments over an extra month or two. If this is your course of action, it’s important to remember two important points:
- Pay more than the minimum payment. Those who pay only the minimum will likely not be able to pay their card off, as the interest will consume most of the payments. It might be tough to find the money, but that’s why it’s so important to not bite off too much with your purchases.
- Pay on time. If you don't pay on time than all of your careful spending will have been for nothing. You will be hit with late fees and your reputation as a credible customer with the bank will be set back. Worst of all, the larger-than-reasonable purchase you made is going to hang over your head for much longer than the sticker price.
Taking these important steps will allow prudent cardholders to be set for a better chance at renting a first apartment, or purchasing a first vehicle, or any of a countless variety of other options. Start early, spend carefully, and pay all debts on time.