I never had financial education as a teen. I spent my money faster than I earned it. When I got my first credit card at 19, I bought hats, clothes and food. I applied for another card soon after my first one and was approved and before I knew it, I maxed it out both of them and didn’t pay them back. My credit was destroyed at 19 years old. I couldn’t get approved for any loans anymore. I finally paid back my debt when I was 26 and my credit scores went up when those two credit cards showed I paid them! It took me 26 years to understand credit and how important it is to have. If you’re young, please do not do what I did and learn from my mistakes.
Teaching Yourself To Be Credit Score Savvy
To prepare yourself for successful financial future, you open savings accounts, get paid allowances from your parents or get paid from your job, and learn to spend your money wisely. And with the financial crisis going on and banks closing down all around us, the proof of poor money management is right in the face of the younger generation more than than ever before. That’s why it’s up to you to use all the negative economic news to know the importance – from this day forward – that every financial decision you make will impact your credit score starting today.
In these times of the current credit crisis, a young person’s credit score is more important than ever. “Young adults today are confronted with a series of financial challenges that their parents never had to experience,” says Dara Duguay, director of Citi’s Office of Financial Education and author of Please Send Money: A Financial Survival Guide for Young Adults on their Own. “They have easier access to credit than older generations. Credit is a powerful tool, and a big responsibility.”
The Financial Fingerprint
Teens must understand that their credit (FICO) score will essentially become their financial DNA. You must drill yourself with these new credit vocabulary words just like you are preparing for the SAT, you should also make sure you absorb the ins and outs of credit information. You’re striving for a “perfect credit score” of 850. Just like colleges look at SAT scores as proof of academic success, credit scores will be used in the same way to see if you’re grade is good enough to borrow money.
“Credit scoring is more strict than ever,” says Beth Frantz, a loan originator with Eagle Nationwide Mortgage Company who’s worked in the financial industry for 25 years. “We cannot lend to anyone with a credit score below 580… period,” says Frantz, explaining why an excellent credit score is so important. “A score of 720 is now the benchmark for determining the best credit, and additional fees are charged for anything below a 720 credit score. This is not lender specific – these are Fannie Mae and Freddie Mac requirements now.”
Adds Duguay, “Practicing good spending and payment habits now – and building a strong credit history – is essential to getting credit later to rent an apartment, buy or lease a car, or apply for a job.”
While the formulas used to figure out a credit score are complex, the steps to obtaining one are not. Being a teen you must know that like a resume, a good credit score is something that is built over time – starting today.
Avoid the Early Credit Card Trap
“Credit cards have a message,” says Paul Richard, the executive vice president of the National Center for Finance Education (NCFE), a nonprofit group dedicated to teaching money management. And that message is “spend.”
The proper plastic position to take, says Frantz, is reminding your child that it’s OK to be “poor” and do without while in college. “That’s why they’re there: to learn to earn.”
Todd Huettner, a financial analyst and consultant specializing in credit issues, reminds parents that although these tips are obvious to adults, they may not be obvious to children who are used to always seeing credit or spending in use, so be sure to know the difference in credit and spending. “Use cash for all personal purchases,” Huettner tells students. “If you run out of cash, then you are out of money. It takes self discipline.”
So how can you as a teen build a credit history without plastic? For starters, consider that FICO uses credit diversity as 10 percent of the overall credit score. “The best way to establish credit is to save up enough money for a substantial down payment on a car,” advises Frantz. ”Teens may qualify for a car loan on their own or with their parents cosigning.”
Officially on Your Own
When your earning a regular monthly income from a job, your finally ready for the responsibility of a credit card. Candi Hinton Sparks, author of the Can I Have Some Money?, puts it simply: “Have an regular monthly income if you are going to use credit.”
Before applying for credit cards, be sure to shop around. “Signing up for a credit card is not like buying a candy bar – it takes research to find the best credit card,” says Bill Hardekopf, CEO of Low Cards, the leading consumer resource for credit card information. “Compare cards by looking through terms and conditions and the actual interest rates and fees. Look for a card with a low APR, no annual/yearly fee, and a grace period of 21 days.”
Don’t respond to every single credit card offer you receive “to build credit.” Joseph Onesta, former director of education for Consumer Credit Counseling Service of Los Angeles, warns young adults to avoid the temptations of T-shirts and other freebies they can get for applying for their credit card. “Excessive inquiries and application for credit can damage a credit score for upwards to two years,” says Onesta, and such activity comprises 10 percent of the overall credit score.
And, don’t try building your credit history by your parents adding you as an authorized user on their own credit cards. “New FICO scoring guidelines don’t create a score for authorized users,” advises Siegel, “so this will not establish a credit profile.”
Young adults can, however, build credit by taking out student loans, explains Bob Friedman, director of student finance at Yeshiva University. “Students should borrow only what is needed and exhaust federally guaranteed student loans first.” Then they can use state and institution loan programs to bridge any gaps.
Using Credit Responsibly
The ultimate goal is not just to establish credit, but to establish good credit. At 35 percent, On time payments is the single most important factor to one’s credit score. Sign up for payment alerts or schedule payments online. If you don’t make your credit card payments on time, you will see a driop in your credit score and it will ruin your chance for borrowing money later. MAKE PAYMENTS BY THE DUE DATE!
And remember that credit does not replace cash. “Credit cards are not an income intended to help buy things that you can’t afford,” reinforces Onesta. “Those who get the most out of their credit cards understand the value is convenience, not available credit.” Your credit cards are for important things and emergencies, not for shoes or outfits or cool accessories.
It’s just as important to not use all available credit. “Maxing out a credit card is nearly as bad as being late with payments in terms of the immediate impact on the credit scores,” cautions Patrick Ritchie, author of The Credit Road Map. A significant 30 percent of the credit score is represented by the amount you owe (balances owed) to total available credit (credit limits). The lower the amount you owe on the credit card, the better the credit score.
Patience, Planning, and Self-Control
A good credit score takes years to develop, but far less time to destroy, and raising a low credit score isn’t easy. Scott Mitic, founder and CEO of TrustedID, a consumer and business identity theft protection company, says, “There is no quick fix to a low credit score. It’s like losing weight. There are things you can do to look better for a few weeks, but if you really want good credit health, you must behave well over a long period of time.” And this means making payments on time and not using credit to buy useless items or maxing out your credit card.
Your Credit Score is Based on These Factors
It’s important to for kids and teens to know about responsible spending while you are still young. Gayle Reaume Skiera, founder of The Money Academy, an educational company that works with youth to help them become financially independent and responsible – sums it up well. “Kids learn best through hands-on experience. Transfer financial responsibility to kids gradually, letting them make decisions and mistakes while the stakes are small.”
You can always get the info you need about building a good credit score at Experian.com