Have you struggled to manage your credit in the past? Are you still trying to boost that credit score? Are you getting hit with high interest rates or even turned down from student loan refinancing? If so, you’re not alone. We have worked with countless young professionals that either have a lower credit score or had a small error that led to a bad credit score. So today, we will tackle a few ways to start building a strong credit score and history from early on. And while this first section is pointed towards high school or early college years, I think many will find some important takeaways.
In the last section of this post, we cover what bills and payments can and can’t (assuming you are not skipping the payment in general!) affect your credit score and history.
Personally, I believe the credit issues that many face today go back to the fact that our country (especially our schools) do not take personal finance or financial literacy serious. Navigating young adulthood is never easy especially for those who are ready to flee the nest. Having good credit could make their experience much easier because they will have less issues getting a car loan and they will likely not have to pay higher interest rates for the loans they get. As a parent, one of the best things you can do to make your child's life easier is to educate them about credit from an early age.
Below are a few pointers on how you can put your child or yourself, if you are a young adult, on a path to good credit.
Open Savings and Checking Accounts
A savings account is an easy way to introduce financial responsibility with little risk involved. However, just having a checking account and a debit card does not improve your credit score. The secret to good credit rating is having solid money management skills from a young age. Do not just open the savings account and leave it at that, help them regularly deposit the money they earn. Teach them to pay for purchases using their debit card. By doing this, you will be teaching them how to spend wisely and avoid declined debit card penalties.
Encourage Your Teen/Young Adult to Get a Job
For your child to be a responsible adult, they need a solid work ethic. If they are in high school or college, they can get a part-time job. This will help them learn the value of money, enjoy the thrill of having their savings grow and feel the disappointment of blowing all their savings because of a wrong decision they made. Other than that, having a steady income can be handy when they are ready to apply for their credit cards. Credit card issuers have to verify applicant's source of income before issuing a credit card.
Add Your Child as an Authorized User on Your Credit Card
If you think your child/teen is not ready for their own credit card, you can add them as an authorized user on your credit card. The issuer will allow it as long as your credit habits are sound. Making them an authorized user is a great way to help your child establish their credit record. Even though you are the one liable to pay back the borrowed money, it helps if your child pays off their portion. By doing this, you are not only teaching them to be responsible but also growing their credit as you use and pay off the card each month.
Pro Tip: You can add a limit to their card, for example, little Suzie can’t spend more that $300 on her card. This avoids the concern of Suzie buying the iPhone 10 with her friends.
Put One Utility Bill in Their Name
This is more for good habits than it is for credit building. If your teen still stays at home, it would be a good idea to let them pay at least one utility bill around the house. While paying bills on time are not reported to credit bureaus failing to pay is reported (see our next section below). Therefore, paying bills on time does not build credit, but it is an opportunity for them to learn how to budget and pay for their bills when they do not have much at stake.
Have Your Child List Your Home Address as Their Main Residence
Full disclosure, I did not know this one and wish I would have! This applies to children who have already gone off to college. Lenders want to see stability when it comes to an individual’s living arrangement, but college students change their address at least once a year. Having your son or daughter list your home as their residence will make them more favorable when applying for a credit card than having to list four different addresses within four years.
One other topic I wanted to address in today’s credit post is the bills that affect your credit score. Few people are aware that when it comes to your credit score, doing the right thing doesn’t always help. Certain bills that you pay on time, like utilities and telephone bills, actually don’t help your credit score. However, if you fall behind and the company extending you credit reports your negative status, your credit score will go down.
According to a survey conducted by the TransUnion credit reporting agency online, just under half believed that their rent payments were regularly reported to credit monitoring businesses. So then, which bills will affect a credit score?
Why Some Bills Affect Your Credit Score and Others Don’t
The difference between bills or payments that affect a credit score and those that don’t depend on whether the payment pays off a loan some lender extended to you or the bill is a payment for a service. Banks regularly report payments to credit reporting agencies. The practice helps lenders determine your creditworthiness, whether you will be a good risk if you are asking to borrow money to purchase a car or home. Some services also use credit reporting agencies to determine whether it will be safe to enter into a long-term contractual agreement with you like a monthly cable or telephone service.
The practice of reporting to credit agencies is expensive. It costs money to gather the information and to make the report. Lending institutions have been in the business of the exchange of this information and it is built into the practice. It is not the case for service industries or the rental housing industry. Moreover, there is no federal regulation or law that demands that businesses report the timeliness of your payments to a credit reporting agency.
Another issue with businesses making the reports to credit reporting agencies is that it will expose them to a law called the Fair Credit Reporting Act (FCRA). The business can request a credit report under the FCRA if there is a “legitimate business need” based on a transaction that you initiate. However, the business will have to follow the rules of the Act and provide notice to the consumer that they pulled your credit report.
There is a sound business reason for looking at your credit report for some businesses like a cell phone company. However, there is no benefit to the business to report timely payments, so they don’t incur the costs of making those reports.
However, service providers such as these along with lending institutions will report if you don’t pay your bills at all. They will report if they have to hire a collection agency to collect payment from you after they have discontinued providing you with the service or they have repossessed whatever you used to buy with the loan.
Pro Tip: AVOID PAYDAY LOANS! So-called “payday” loans have become a topic of interest. These short-term loans are controversial because of the usurious interest they charge on these loans. The payday lending industry does not as a rule report payments or defaults to the major credit reporting agencies. However, the Consumer Finance Protection Bureau reports that there exists “specialty” agencies that track your payments of these payday loans.
Helping or Hurting Your Credit Score
So, which monthly expenditures or expenses will affect your credit score? The answer is all of them, if you don’t pay them at all. If you are wondering which ones can help your credit score if you pay on time, they include loans like:
- Mortgage payments
- Student loans
- Auto loans
The bills that won’t help your credit score include:
- Utility bills
- Apartment rent
- Club memberships
If you are worried about your credit score, only good planning and finances can help. Talk to a financial advisor if you are planning to take out a substantial loan and you have concerns that your credit score will make a difference. Building credit is a noble goal, and there are many ways to achieve it. The above are just a few tips to help you on your journey. The idea is to start early and go slow.
Written by Chad Chubb, CFP®