Start Building Credit With a Secured Card
One of the first things I did when I turned 18 was apply for a secured credit card and I would not be where I am today if I hadn't. I'm so tired of hearing people give advice like "Avoid credit cards," or "Stay out of debt." If you are smart about debt it can be one of your greatest allies towards building wealth! But, your first few moves can set the tone for years of credit history and that's why you want to get started early and have a plan.
Getting a secured credit card is a great option for someone turning 18 or someone looking to rebuild their credit after a major set back. Secured credit cards get their name because you have to put the money up front and whatever amount you put in becomes your "credit limit." So if you get a secured credit card for $400 (what I started with) you have to deposit $400 into the bank and then you can charge against that $400. It's called a "secured" credit card because in the event that you don't pay back what you charged the bank just takes the money you have in the account.
Secured credit cards are pretty common and if you're interested in one I'd recommend talking to the bank you currently use as they may have some referral bonus or program. Also, a quick search online will give you a list of the big credit card companies and some of their offerings. There probably won't be too many benefits with basic cards like these but I'd avoid anything with a lot of fees or restrictions.
There are some basic rules to using credit as well that are very important for someone looking to build credit. First of all..
Rule No. 1 Don't use it all
Just because you can buy $400 worth of goodies doesn't mean you should. The lower the better, I'd say try to stay under 50% of your credit limit. Now I know sometimes life happens and the ease of using credit can help us get out of sticky situations and that's where rule No. 2 comes in.
Rule No. 2 Pay it off
Don't let that sucker build up. One of the main traps of credit cards are their interest rates which honestly are quite ridiculous. If you ever hear people complaining that it's impossible to pay off credit cards it's probably because they charged more than they could manage and didn't pay it off and now the interest is compounding to the point that most of their payments probably just cover interest. If you follow rule 1 then rule 2 should be easy. Next.
Rule No. 3 Be predictable
If you were lending money to someone what kind of history would you like to see? How about regular predictable expenses that are paid off in a timely manner? When I got my first card I only used it for gas. So I used it 2 or 3 times a month charging between $20 - $30 each time and I paid it off at the end of the month. If you use your card in a chaotic fashion then you will give the impression of having chaotic finances which is no way to build credit. Develop a system where you know what you are going to use your card for and you know when you will pay it off. Stick to that system!
If I remember correctly I had my secured credit card for around a year before I graduated to a big boy credit card (unsecured). If you can remain responsible with a secured card then by the time you are able to get an unsecured card you will feel confident in your ability to handle it. Just remember it may be made of plastic but it is not a toy. Be smart with it and you will start building up your credit score in no time and you'll thank yourself when you are sitting down for loans and you get the most competitive interest rates (and save a lot of money). We will cover unsecured credit cards later.
© 2019 Derek