Teenagers, Build Your Credit with Caution

By Sandra Wellman

This article is for young people just starting to build their credit, not just for teenagers.

Building credit can be a very exciting thing.  Once you have your first job and receive a few paychecks, you are thrilled with all the money you now have to spend.  If you are still living at home, you don’t feel any need or pressure to save any money.  Many young people try to keep up with their friends buying the latest clothes, computer gadgets, accessories, CD’s and concert tickets until you have no more ready cash.  

You just found a great outfit for a party or a date; your low on cash and the store is giving you a 10% discount if you apply for their credit card.  Wait! Most department stores charge 19-23% interest! If you are just starting out and have good credit, you can get a much better rate from other credit card companies; however, this may be one of the only ways to start getting credit if you have none. Now, if you still want to get your 10% discount, because this store frequently gives discounts for using their card, go ahead, but keep one thing in mind, you need to pay at least 30-50% of the bill every month or you will be giving back the 10% discount you thought you just got.  

            Here’s an example:

            Balance owed on account:           $190.00
            Yearly Interest Rate:                     19.9% (.199)
            Monthly Interest Rate                    1.6666%
            Minimum Payment:                       $  10.00  

If you pay it off in full every month, you won’t be charged any interest at all, unless the credit card company has a special clause stipulating a minimum, most do not.  

To continue our example, let’s say you charged $200 the first time, got your 10% discount, so you paid $180. When you received your bill, you sent in $20. This same store had a great sale with an additional 15% off if you use your card. You had a party to go to, so you charged another $200, with your 15% discount you paid $170. Now you get your bill and let’s see what it looks like:

            Previous balance                         $180.00
            Payment Received                      $  20.00
            New charges                                $170.00
            Interest charges                           $    4.16
            Total Balance                               $334.16
            Minimum Payment:                      $  10.00  

Because you didn’t pay your balance in full, you were charged interest on the $160 left from last month, plus $100 of the new charges done a few weeks after the first charge, but after the first bill cycle ended.

Now if you only pay another $20-30, or worse the minimum, you will pay another $5 and change in interest and this will continue. So after 10 months, you will have paid back the two discounts you received. This is their intention! If you keep charging this will make it worse.

Always pay as much as you can each month, without jeopardizing your cash flow too much. By that I mean, have some money available for emergencies.

When you are first starting out, try your best not to charge too much. Pay as much in cash as you can and try to save a little money when you do have extra instead of spending it all. You will have better credit and less stress.

It’s really hard to be disciplined in the area of spending beyond your means. Most people aren’t and that’s why so many people are in huge debt. You need to have enough pride and self-confidence to tell your friends you cannot buy “x”, do “x” or go to “x” because you don’t have enough money. This can be difficult, especially the first few times. If they are a good friend, they will accept it. Prioritizing what you want is helpful. Think twice about that new; out-fit, purse, jewelry, present for your girlfriend/boyfriend or item for your car.  If you spend less or save your money instead, maybe you won’t have to say no the next time you want to do something fun.  

It is important that you be cautious with your credit card choices.  Take each step very slowly and consider all of your options before making a final decision.  When you have several creditors making offers, it can be very difficult to decide on which one to deal with.  Follow these simple guidelines when deciding on and dealing with a creditor:  

1.       What interest rate are they offering?

a.      The interest rate on your credit account plays a serious role in your ability to keep up with your payments.  Be careful when getting 0% interest rate credit cards. You are definitely more inclined to over spend, and when the introductory rate, as it usually is, runs out, you will have to start paying interest. Try to get a 0% credit card that has a decent rate when it runs out. 8-10% is fairly average and a good rate.

b.      Do they charge a yearly fee? Nowadays, if you have good credit, you can get credit cards with no yearly fee. Be sure to read the page with the information on all the various fees you can be charged.

c.      There are also credit card companies offering cash back bonuses and travel miles. I would first look at getting a low interest rate and no yearly fee, then if one of the other bonuses apply, great!  

2.      Make your payments on time.

a.      Do not make late payments. Keep your bills organized so you know exactly when they are due. Send them 6-10 days before they are due, depending on where they are located. Credit card companies generally charge $15-35 per month if you are late, plus it will be reported on your credit report. Making on time payments will keep your credit score high and you will have more options in the future.  

3.      Do not apply for credit more than 3 times a year, 4 max.

a.      If you do, you can easily be denied credit because those actions are perceived as shopping for credit.  If you are suspected of shopping for credit, your creditors will deny you.  You can keep track of how many times you have applied for credit and with whom by looking at your credit report.  Your credit report shows all the people who have inquired into your report for the last 2 years.  After 2 years, the listing drops off your report.  Once you begin paying a creditor, take it slow. You are going to get many credit card offers, and it is extremely tempting to take them all up on their offers.  

4.      Keep all of your receipts and contracts

a.      Keep all of your receipts for payments made to any creditor.  Yes, creditors have been known to misplace a payment received, let’s hope it isn’t yours.  Rest assured if it is, providing you kept your receipts.  Saving your contract with any creditor is highly advised.  In the event that a dispute should arise, the creditor will be sure to throw in comments concerning your agreement and signature on the contract.    

The most important thing to do when building your credit is take pride, protect it, respect and especially enjoy it.  Having good credit is a luxury and can widen the horizons of possibility for you and your future, providing you pursue your credit with caution.