I am High School student in the top ten percentile and I am turning 18 in a few months. I need strategies on how to build and maintain a great credit score quickly. I have had the same job for over a year now and when I turn 18 I am going to be promoted to Manager, I don't know if that affects my eligibility of having great credit. I am interested in purchasing a small home soon. Where do I begin when it comes building a great credit score? Is it okay to begin with a department store credit card?
Based on the formula used by FICO which is pretty much what you want to focus on, the following is recommended for someone with no credit history:
- Get 1 department store card or gas card
- Get 1 visa card, unsecured with at least $500 credit limit (but make sure its with a prime company that can grow your limit to at least $4500 over time)
- Get 1 mastercard, same as above - meaning stay away from Household, Capital One and the like.
When you get all this, follow the following habits to make sure it does you some good:
- Pay the statement balance in full each month
- If you can't pay in full, pay at least 150% of the minimum payment and don't carry the balance for more than 2 months
- NEVER get cash advances on your cards, EVER
- Be smart with balance transfers, don't use them unless you know the fine print inside and out
- NEVER exceed your utilization (total debt / total credit) of %30 - better if you keep at < 20%
- Use the annual credit report website to ask for your reports free once a year
- Paying for monitoring service is NOT necessary and often doesn't do you any good, but definitely DO NOT pay for their score service, its FACO (meaning their own score) and will mislead you on the health of your credit, get your real scores from myFICO.com once every 18 months and you'll be fine
- NEVER EVER miss a payment or pay late or go over your limit (in fact call them and make sure they set your account to NOT be allowed over the limit, better declined than paying through the nose)
- Don't keep opening new accounts or closing accounts because each time it resets your average length of credit history and it will hurt you, the longer you stay with it, the longer it will show you as steady credit holder the more good it will do you, you want to aim for at least 8 years of credit CONTINUOUSLY
Follow these and you will do great, I started with a $500 Discover card and $500 Chase Visa at UCLA and a Union 76 gas card, I had 700+ credit in less than 2 years. Good luck and be vigilant.
The details of credit score calculation tend to change periodically, but the fundamentals are mostly consistent. Pay your bills, keep your average account age high, overpay your credit card minimums, and keep your overall debt low. And do soft pulls on your credit report to see what's happening.
First, the simplest route: pay all your bills early or on time. Automatic deduction may be useful in this regard, especially for bills with predictable amounts. A corollary to this tip is to never leave an unpaid bill. What often happens to young people is in the course of moving around they leave the final bill unpaid and it gets reported to collections. Make sure you follow up online with all bills, even after canceling the service.
Second, average account age and oldest account age matter. Open an account like a credit card and never close it, so you'll have an older account (hopefully a zero-fee card). Try to keep other accounts open rather than closing them (no need to cancel a zero-fee credit card) so your average account age stays higher. A card that works on internal systems (like a gift card) is not going to show up on a credit report; a card that works like any VISA/MC is likely going to show up. The rule of thumb is if they need your SSN to run a credit check for the application, then the card will appear on a credit report. You can pull your credit report to find out if the card is listed (you may have to allow time for lag before the card appears, but I'm not sure how long that might be).
Third, a tip for extra credit score is to pay more than the minimum required on credit card bills. You can achieve this by either using your credit card at least once a month or by leaving a small hanging balance each month so there's always something to overpay next month. Credit card reporting will be either: unpaid, underpaid, minimum paid, or overpaid. Minimum payment helps your score and overpayment helps more. If you can use your credit card every month, that will give you something to overpay every month. Otherwise, you can leave a small debt left on the card but still pay over the monthly minimum. However, your total debt load, especially debt carried on your cards, counts against your score; aim for less than 10% of your limit.
Finally, of course, is to pull your credit report periodically. You need to know what others are seeing. Since debt load utilization matters, make sure the reported card maximum is correct on your credit report. Talk to your bank or account issuer if the limit is wrong. If a collection appears, then you need to handle it. Often you can negotiate with the collector, but be careful to negotiate how they will report the resolution. You want them to agree to remove any negative information (either in exchange for payment or because of a mistake). Failing that, you want them to mark it paid in full or satisfied in full; letting them notate your score that you only partially paid is what you want to avoid, since it most signals someone with cash flow problems and credit issues. They control their reporting to credit bureaus, so if the person on the phone demurs, ask to speak to their supervisor or someone with negotiating authority. Try to get any agreements in writing.
Remember that your total debt load is a factor in your credit score. Home loans and student loans do affect credit score. If you take on a smaller home loan, then it will affect your credit less harshly (and leave you with smaller monthly payments).
Your goals are excellent. I really admire your thoughts and plans, and I hold you in high esteem.
Good credit is indeed an important thing to have, and starting young is THE smart idea with respect to this.
I see that you have as a goal the purchase of a home. Indeed, another fine ambition. (Wow, you are a different breed from what I normally encounter on the internet; that's for sure !)
Since this won't happen overnight, I would encourage you to think about another option. At this point in your life you have what few people have: options, and you have lots of them. The option I would like to suggest you consider is the debt free life.
This does NOT mean life without a credit card, nor does it mean living with ones parents all their days. In its simplest form, it means that you don't owe anybody anything today. An adapted form of that; with the reality of leases and so on, is that you have more immediate cash in the bank than you have contractual responsibilities to pay others.
e.g., if the rent on a place is X, and the lease is 12 months, then you don't sign until you have 12X in the bank. That's the idea.
If there is anything good that these past 10 years of recession and financial disasters have provided us as a nation, it is a clear picture presented to our young people that a house is not a guaranteed way to riches.
Indeed, I just learned this week of another couple, forced out by foreclosure again.
Yes, in the 1970s and 1980s the formula which anyone could follow was to take a mortgage on a single family house; just about any house in any community; and ten years later double your money, while (during those ten years) paying about the same (and in a few years, actually less) amount of money as you would for an apartment with about half the space.
Those days were then, not now, and I seriously doubt that I will ever see them again in my lifetime. You might, at your age, one day.
In the mean time, I would like to suggest that you think about that word options again; something that you have that I don't.
If your mind is made up for certain that a house is the one and only thing you want, okay; this does not apply.
During this time of building your credit (we're talking more than a year) I would like to encourage you to look at some of the other options that are out there waiting for you; such as...
- The stock market
- Your own business
- "Wild" investments (futures, metals, etc.)
- Whatever else comes to your mind
I also encourage you to take a calculator and a spreadsheet (I would be surprised if there is no freeware out there to do this with a few clicks) and compare the past 30 years of various investments. For example...
- Go back to 1984
- Factor in inflation
- Use that smaller number for a starting point
- Calculate the investment return today for that path
- Repeat it for an investment in a house
- Compare the two numbers
It is especially educational if you can see line charts, with the ups and downs along the way.
One last thing; about the stock market, you have an option (I love that word when people your age are actually thinking) called "dollar cost averaging". If you are not aware of this concept, just ask and I will edit this post (although I'm confident it has been explained by others far better than myself on this very site). Hit just about any solid stock market investment (plain old mutual fund, even with a load, and it will still work) and I believe you'll see what I'm trying to get across.
Still, yes, you need a roof, and a young person should clearly plan on leaving parents in a healthy and happy way; so again, if the house is the one and only goal, then go for it kid (uhm, "kid", if you're still under 18). All the best. Do remember that you will be fixing the pipes, not the maintenance guy.