In today’s tight consumer credit market, it’s harder than ever for someone starting out on the road to financial responsibility to establish strong credit; and even with new legislation intended to protect credit-holders, the stakes may very well be higher now than they were twenty, ten, or even five years ago. A few key credit facts can go a long way toward helping teens and young adults establish a positive credit history that works in their favor when it’s time to start making big decisions.
Here are some useful credit tips to help the youngster in your life avoid debt as an adult.
1) You Don’t Have to Use Credit Cards to Start a Credit History
To get credit, you have to have a credit history. This might seem like a baffling contradiction at first, but remember that keeping current accounts other than credit cards can also start the ball rolling on documenting your responsible financial behavior.
Credit cards offered to students and others with weak or nonexistent credit history are often fraught with hidden perils and predatory terms that might activate unexpectedly. Collaborating with responsible adults to put another account in a teen’s name, such as a secondary telephone, builds credit and good budgeting habits at the same time.
2) Student Debt is a Different Animal From Credit Card Debt
Student debt is the “other” major category of debt that’s most likely to influence a young person’s life. If student debt climbs out of control, it can’t be eliminated by bankruptcy, and may make debt consolidation more complex, as — from year to year and semester-to-semester — it may come from multiple creditors. Student debt can easily grow beyond expectations, as payments do not occur until after graduation, but interest continues to accrue as balances mount “behind the scenes.”
Be exceptionally wary of private student loans, and double-check all information from a university’s financial aid office; a few of these have been implicated in collusion with private lenders who advertise on campus. The old age “trust, but verify” applies here. A student should never sign a promissory note without the input of a responsible adult, and preferably not without consulting an independent financial advisor first. Neglecting this step (tempting when “everyone has student debt”!) can have decades-long consequences!
3) Getting a New Credit Line is a Double-Edged Sword
Opening a new credit line temporarily reduces your credit score, but when managed effectively, larger, value-added credit lines open greater opportunities and establish more trust. No matter the size of your overall credit holdings, you should strive to use only a fraction: the ratio of your total credit line to your current balance is one of the most heavily-weighted factors in your credit score. This leads directly to the next point:
4) You Don’t Have to Use Credit Cards to Grow Credit, Either
Once you have an established credit line, you do not need to actively use it to maintain a credit score. Most creditors will eventually close a line of credit that goes unused for a prolonged period of time (a year or more) but any transaction, no matter how minor, will keep the account alive; and, if paid off right away, it can only count in your favor.
Often, credit lines will grow without much use; but you should always be aware of this, and be aware you can refuse credit line increases and revert to your previous limit if you wish. If creditors make changes to your account you are not comfortable with, those with negligible balance have added clout for negotiating, refusing, or just going elsewhere.
The credit landscape is evolving along with the legislation that impacts it; but the basic facts about credit cards remain the same. Used responsibly, consumer credit can be part of an enriching financial strategy, and it’s never too early to start setting good habits.