What’s the Best Way to Establish Credit?
I did something last week that I thoroughly enjoyed. I spoke to the entire boy’s senior class at The Westminster Schools in Atlanta. It was the 5th straight year the school was kind enough to invite me to speak with their seniors. This week I’ll speak to the entire girl’s senior class. The topic, as you probably have already guessed, is how to not screw up your credit while you’re in college.
I have to admit the first year I agreed to speak at the school I did so on one condition. They had to let me eat in the cafeteria. I was SO hoping for the ubiquitous rectangular shaped pizza, and I was not disappointed.
Keep in mind these young adults are all 17 and 18 and all of them are headed to college campuses in the fall. And up until last August they would have been lambs to the slaughter…credit card style. The card issuers would have been on campus trading t-shirts and coffee mugs for credit applications. No more. The CARD Act has largely put an end to marketing on college campuses.
So the question many of the kids had, now that a credit card isn’t so easy to obtain…how am I going to establish credit? This is the million dollar question. We all have one chance to establish credit for the first time. After that we’re left to re-establish or re-build our credit, but we can’t ever establish it again for the first time.
The best way for the kids, and anyone else for that matter, to establish credit is to choose one of these two options…complete with pros and cons of each.
Secured Credit Card – A secured card is a real credit card. It’s issued by a bank. It has a Visa or MasterCard logo. And, it can be used just like any other credit card. The one huge difference is the fact that the credit limit on that card is determined by an amount of money YOU deposit with the bank. So, if you deposit $1,000 then the bank will give you a $1,000 credit limit.
If you screw up and don’t pay your bill then they’ll simply take it out of your deposit. Secured cards are not a great long term credit product but they do serve a purpose. They’re great for rebuilding poor credit and they’re great for establishing it for the first time.
There are a variety of web sites where you can shop around for the best secured credit card. They all have fees and the rates aren’t the best in the market but that’s ok. The sole purpose for the card is to get a good account on your credit reports with the long term goal of improving your credit reports and credit scores to the point where you’re offered unsecured cards with much higher credit limits.
Authorized User – This is how I established credit. My parents added me to one of their credit cards as an authorized user. An authorized user is simply an additional cardholder who does not have liability for the payments on the account. They get a card in their name, have full charging privileges, and usually the account shows up on their credit reports. If the account is in good standing, has never been paid late, and the balance isn’t too close to the credit limit it will help to establish a pretty darn good credit score for the authorized user. And, if the parent misses payments or maxes out the card the authorized user can simply hop off the card by having their name removed from it. The account comes off the credit report and…no harm no foul. It’s like having a credit card with training wheels.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.