Disclosure: I may receive compensation if you are approved for any cards from this page
Why You Need Credit
Depending on your upbringing you may have been told that “debt is bad”, “credit cards are bad” and maybe you only use cash to purchase things. I can appreciate that thinking to avoid debt. The downside to this is that always paying cash you cannot establish a credit history. Without a credit history of your own you can never finance a car or house purchase on your own. Unless you pay cash for those as well, you will not be able to live the “American Dream”. If you have been following my blog you know that I am heavy on Real Estate investing as the #1 way to build wealth and change your future. Although it can still be done without credit, it is much harder to do. And that new car you want, maybe they will still finance you because they know they can repossess it if you don’t pay, but you will have a very high interest rate. And being a homeowner, not likely. Most lenders do not lend to people with a credit score less than 650.
The Difference Good Credit Can Make
The good thing is that you have No Credit which is actually better than Bad Credit. My 18 year old daughter just graduated High School and due to the Covid-19 outbreak we were not able to visit our local bank branch for a few months. We have a small car loan for her vehicle that was in my name only since we opened it before she was 18. We wanted to now switch it to her name so that she can begin to build credit. The loan has only a small amount remaining and she has more than enough cash to pay it off, but to build her credit we need to keep the loan. Doing it in her name only since she has no credit they can do it for her, but at 18% interest. Since I don’t want to see my baby girl get ripped off, I added my name back to the loan as a co-borrower which then brought the interest down to 3.5%.
She is going to College this Fall and instead of paying for housing we want to buy a house for her and some roommates to use. This way by the time she is done the house will have built up enough equity that if we decide to sell it the proceeds can be used to pay off any student debt she may have. Of course we are trying to avoid all student debt with scholarships & work study programs. The problem is that ideally we would like her to be able to have the loan in her name so that it is her house. And as a first time buyer she would get a low interest rate and excellent terms with a low down payment. Unfortunately since she has no credit, she cannot get a loan as a primary borrower, even with my wife and I as co-borrowers. Luckily because of Real Estate, we can still buy a home there to use and then when she is done with school, if she decides to stay there we can refinance it into her name.
Not Too Late
Even being a Finance nerd with other things going on at the time I didn’t think about helping her start building credit as soon as she turned 18. Because of my thoughts being on other things, we missed out on almost 6 months to build credit.
With the car loan now in her name she will begin to establish her own credit history. We have also applied for a credit card for her to use. Most cards these days for people with 0 credit will require a deposit to be made. Basically they treat it like a checking account. You deposit funds with them and that amount establishes your credit limit. You use your card to borrow from that amount and then pay it back. Just as you would do with a traditional credit card, except with this type of card there is no risk to the credit card company since it is your own money. Do this over a period of time, 6 months to 1 year, and you will likely have established enough credit to open a traditional credit card.
For a list of cards that work for people with low to 0 credit history, use this link HERE.
For College students, there is a special card designed just for you. You need to be registered and have a student id but it has some nice perks like 1 year Amazon Prime for free. Check it out HERE.
Even if you already have bad credit you can still work to fix it and build good credit again. It will take more work and hopefully you don’t have a lot of debt to get out of, but it can be done. The main things to keep in mind is to never charge more than 50% of your credit limit and be sure to ALWAYS pay on time. There are many factors that decide your credit worthiness but paying on time is one of the most important. Paying late means you are higher risk.
Guard Your Credit
Once you have established good credit, make sure you work hard to keep it. It takes a very long time to establish excellent credit, but it can disappear in the blink of an eye. Watch out for scammers and identity theft. That can destroy your credit. Keep your Social Security number and other personal identification information safe. With almost everything operating online it is easier than ever for scammers and thieves to get your information and your bank account. NEVER open a link from an email that goes into any account. This is called Phishing (pronounced Fishing) and that is what they are doing. They send out a bunch of emails, like a bunch of fishing lines, and hope someone bites. They send what looks like an official email from your bank or some other company saying something like, “there is an issue we need you to correct by logging into your account.” Then you click the link, it takes you to what looks like your bank login screen, you put in your user id and password and everything seems legit. It may even open to the actual website after that. But you have just given that person your login credentials so they can then go in and lock you out and do whatever they want with your account.
Believe it or not, this happened to me once. I was at work, I was selling some coins on eBay and I got an email. Since I was at work I didn’t have my mind focused on my email and I opened the link. When I tried to log in again the next day to check how high of bids I was getting, I couldn’t log into my account. I thought it was strange but then someone suggested I look up the item I was selling. Sure enough, there it was, but it now had some additional writing in it. Someone had got my info. Lucky for me I checked it so soon after. I was able to get eBay to remove that listing and reset my password for me to get back control of my account.
Unfortunately this happens a lot. So be very careful. Scammers are everywhere trying to steal your information to use. I’ve also had someone get my credit card info a couple of times. I have no idea how. But each time my credit card company was on the ball and they contacted me to verify if those purchases were mine. The funny thing is the two times this happened I was told about these purchases right when we came home from the hospital after a child of mine was born.
Be Smart
Use your credit wisely. Don’t use a credit card for things you don’t need and never charge more than you can actually pay back. Ideally I say whatever you charge, pay it off right away. You can set aside the money you charge each day into a savings account so when your bill comes you have the money to pay it off. It can be good also to carry a small balance each month to make continuous payments. This may help more than just paying it off each month. Don’t carry a large balance, but maybe if you charged $100, your minimum payment may be $10, maybe you could pay $80 to leave a $20 balance for next month. That way the interest paid each month will be very low but you are showing a steady payment history.
There is good debt and bad debt. Good debt helps you in some way. Like leveraging a rental property or for a reliable and affordable car that can get you to work. Bad debt is overspending and buying things you don’t need that get you trapped into debt so you can’t enjoy life because you have to only work to be able to pay your debt. Please avoid this unnecessary debt. Only buy what you need and you will be much better off and happier and then you can start working toward financial independence when you can buy your first home and make it a house-hack to live for free.
Be sure to check out the Travel Rewards tab for a link to more credit cards available. Eventually you can start working on earning travel rewards or get a business card.
Here are the two cards mentioned above. For no credit use THIS. For College students,use THIS.
Disclosure: I may receive compensation if you are approved for any cards from this page