If you are young and just starting out in life, here is a piece of advice. People will tell you that you need to establish credit. There is a way to do it without falling into a trap. Get two credit cards. Charge a couple of things that your bank account can afford to pay for. Pay them off right away. You will be establishing credit without falling into the great American trap of credit card debt. Once you establish credit, you can get a decent car loan.
I know. I wish I could slap 18 year old me and tell her to start a savings account, and go to community college instead of that expensive private art school that I still owe money for. Hindsight is 20/20. All we can do is warn the young people we know and tell them what we learned. Thanks for the post, hopefully it will help someone avoid credit card debt. It sucks because I'm so frugal now and so good at couponing that it kills me to remember how when I was in college, I couldn't even cook and I blew my paycheck on so many prepared foods, and I never clipped a single coupon in college. Younger me would get a stern lecture if I could go back.
The trouble is, credit card companies want you to spend money and run up bills, so you're paying the minimum payment and they're racking up interest. My daughter couldn't get credit for a car loan, so she did this. She applied for one credit card, bought a couple of things on them and paid them off right away, then got another card and did the same. Once she got her car loan she cut up the cards and threw them away, and of course, now she's paid it off, she has a good credit rating. Another way to establish a credit record is by buying from a mail order catalogue, or interest free from a store. You don't have to face the temptation of credit cards.
It will most certainly boost your credit if you make purchases and make your payments on time every month. If you are just starting out, you may find getting one a bit more difficult due to your limited credit history, however there are companies out there who will offer you a card. Try to pay off your balance in full each month to keep from overextending yourself or having to pay interest. If you have poor credit or a limited history and can't find a card, get a secured card. You will have to make a deposit with the issuing bank to protect them against default, but they report to the bureaus each month and will help you rebuild your score.
Just remember, one of the biggest parts of the trap is the minimum payments that the credit cards are now asking for. A lot of cards that give you a high credit line also ask for a minimum payment that is at a much lower percentage of the balance than the cards with a low credit line. WATCH OUT. That is the trap. You end up thinking you have more money than you do, and you end up opening more accounts with the higher credit line. Pretty soon, you have more than 20 revolving accounts.
Honestly the world would be better without credit card companies but they are a necessary evil. If you are using them to raise your credit then make sure that you don't go overboard with your purchase. Buy only low cost things and pay the bill before the billing cycle ends, that's the trick to remain on the good side of the evil financial corporations and credit bureau.
I think it's so hard to keep kids, or adults for that matter, away from credit cards. I would agree you only need two at most to establish credit. Charging a few things you can afford and paying it off in full is great advice. My kids are young, and I'm going to work with them to avoid credit cards. I'm not sure if they'll be able to get mortgages without a credit history, so one or two cards will probably be necessary. My hope is there will one day be alternative ways to getting loans, rather than just looking at your credit score.
