Mike Dolen is the founder and editor-in-chief of Credit Card Forum, where he shares his tips and advice for managing credit responsibly.
It’s been said that high school is a lot like toilet paper… you only miss it when it’s gone! But regardless of whether you loved or hated it, there’s one thing all high school graduates have in common; as this door closes, new ones open.
One of those doors is credit, which admittedly is not the most exciting thing to talk about. But remember, good credit does allow you to do some pretty exciting things in life, such as getting your own place and financing big purchases like a new car. If you’re an 18 year-old graduate, you probably have a blank credit history…which is exactly why you need to learn these tips now rather than later!
1. “No credit” is not the same as “good credit”
In order to achieve a good credit score, you need to have a history of using credit. This is why it’s usually best to start using credit (at least in some form) early on. That way down the road when you’re ready, it will be easier to qualify for an auto loan, mortgage, and more. Not to mention, higher scores will get you lower rates when borrowing.
2. Credit cards are not bad, but can be used for bad things
Contrary to what some people say, credit cards are not bad. They are a great tool for helping you build a credit history. However like any tool, you can use it with good or bad motives. Use them the right way by only charging what you can afford to pay back in full each month.
3. Secured cards are better for those with less self-discipline
Is there even a remote possibility that you will use a credit card to buy things you can’t afford? If so, then you should avoid normal (unsecured) credit cards. Instead you may want to check out a secured card, which is a type of account where you can only spend up to your security deposit. For example, if you put down a $500 deposit, that would be your spending limit.
4. Pay attention to APRs, not monthly payment amounts
A car salesman loves to tout how low a monthly payment can be. Why? Because it’s a great way to disguise how much you are actually paying for the car! The truth is that whether it’s cheap or expensive has little relation to the monthly amount. A long-term loan with a high APR might be hidden behind that seemingly low payment. Pay close attention to the interest rate, which will affect the total amount you end up paying.
5. Don’t cosign for your significant other
When it comes to love, it’s not much different after high school in the sense that hearts still get broken! So until you are married, absolutely do not cosign a credit account for your boyfriend or girlfriend. Once that’s done, it can literally be impossible to remove yourself unless the other party consents. The problem is, will a bitter boyfriend/girlfriend consent to that after a breakup? Fat chance.
6. Monitor your credit reports regularly
Even if you’re doing everything right, it’s important to regularly check your credit reports. It’s not that uncommon for incorrect or unexpected info to show up on them. You can check your reports for free once per year from each of the 3 major credit bureaus at annualcreditreport.com.
7. Stay on top of your credit score
In addition to your reports, you will also want to keep tabs on your score. Fortunately you can do so on Quizzle, which provides their proprietary credit score for free to consumers.
8. Credit card rewards are not an excuse to overspend
Earning rewards on things you would buy anyway is a great strategy. But don’t let the allure of airline miles, cash back, or gas rebates lead to higher spending…because then you’re wasting money instead of saving it! For example, gas credit cards are a good way to save on fuel, but don’t let the extra savings become an excuse to go inside the gas station and buy a bunch of overpriced snacks.
9. Consider piggy-backing on your parents’ credit
Don’t want to hassle with a credit card and have no need for a loan right now? Well, it’s still possible for you to build credit by “piggybacking” on your parents’ accounts. That means they add your name and Social Security number to their account(s) and as a result, they’ll start showing up on your credit report. However there’s a major risk with piggybacking; negative activity will also show on your report. That means if your parents make late payments – or worse yet, default – you will also suffer the consequences and may even be held responsible for that debt.
10. Don’t cancel your old cards as your credit improves
As an 18 year-old high school graduate, you definitely won’t qualify for something like an American Express Platinum anytime soon! In fact, you probably won’t even be eligible for any of those uber-enticing airline and cash back cards you see commercials for. Instead, you will likely end up with a student card or something of equal caliber. As time goes on though, you will become eligible for bigger and better offers. But even then, there are multiple reasons you should keep your old accounts open.
11. Always pay on-time
Okay, so this one is obvious, but the reason it’s worth mentioning is because many people don’t realize how much late payments can hurt. Once you achieve a very high FICO score of 780 or above, having 30 day late payments may drop it by up to 110 points!
12. Your credit education?
High school education? Check. But what about your education in credit? That is something you will have to learn going forward. Sure, this article is a great start, but there is so much more you need to learn about it! Understanding how credit works is essential, as many mistakes will be avoided simply by knowing the nuts and bolts of it.