You Asked, We Answered . . .

Q: I am 18 and I have no credit. What’s the best way for me to establish my own credit history?

A: You’re absolutely right that it’s good to start building your credit history now. It’s difficult to get a car loan or a mortgage without a credit history, and if you do get a loan, the interest rate you’re charged is likely to be higher, because you’re considered a bigger risk. Similarly, if you want to rent an apartment, your security deposit will likely be higher. Car insurance rates could be higher, utility companies may require a deposit. Without a credit history, life is much more complicated and expensive.

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            Credit-card issuers are targeting high-school and college students, so if you are a student, there may be no shortage of opportunities to get a card. Applications for credit cards are usually available on campus, but they come with a high price.  If you go for one of these cards, be very sure to read the fine print carefully.  According to Nancy Deevers, director of education and community relations at the Consumer Credit Counseling Service of Northeastern Ohio, “Cards for students often have extra-high finance charges.” This makes it all the more important for you to use the card wisely and to pay off balances on time.

            If you are not a student but are working, try a local bank with which you or your parents have a relationship.  Ask the banker about your chances of acquiring the card before you actually apply. You don’t want to establish a history of rejections. Also check www.bankrate.com for a list of banks and the rates and fees that they offer.

            If you run into a problem getting a card on your own, you can always ask your parents to co-sign on a credit card. They may be reluctant to do so, because—face it—they will be liable for unpaid balances on the card, and that will affect their credit history.  For starters, agree to a card with a low credit line, let’s say $250.  Your parents might go along if the bill is sent to them and they can monitor your spending.  Charge a few small items, and pay the balance off at the end of the month. That way you’ll start to build your own good credit history.

            There are two other options to consider:

            Prepaid cards. These secured cards are like telephone calling cards. You deposit money (generally $300 to $500) in a savings account as collateral or security, and that dollar value is tapped whenever you charge against the card. You’re really borrowing from yourself, but you have the convenience of using a card, and you show creditors that you can manage credit. Eventually, if you pay back on time, the institution that has given you the prepaid card will increase the credit line beyond the balance that you have in the account.

            The downside: If the card is stolen or lost, you could lose all the money stored on the card. Fees and rates for these cards vary; both tend to be higher than with unsecured cards. Check www.bankrate.com for best offers. And be sure that the card you apply for reports to the three credit bureaus; some smaller institutions that issue cards don’t. Always read the fine print; beware of secured cards with built-in fees that eat up your entire deposit up front, leaving you with nothing but a large bill to pay off.

            The advantage: You can limit your spending by keeping the amount you borrow against manageable.  It can also help you budget.  The companies offering these cards provide educational material for you. Log onto  www.prepaids.net/creditcards for more information.

             Debit cards. These are tied to your checking account or your parents’ checking account.  They look and act just like credit cards, but purchases are deducted from the checking accounts they are linked to. No interest is charged, though fees may apply. Some debit cards also act as credit cards.

            However you acquire your first card, remember: Use it wisely; don’t abuse it. Pay on time (late fees are getting higher and higher), and don’t carry a balance from month to month. If you can’t pay off the entire balance, always make more than the minimum payment. Balances have a way of creeping up with scary speed—and interest rates are high on unpaid balances. If you make only the minimum payment, you end up paying just a little more than the interest due, which is a recipe for disaster.  

            Remember, the purpose of getting a card is to build a good credit history, not bad debt.

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Financial planner Elizabeth Lewin contributed this answer. She is the co-author of the recently published book “Family Finance” (Dearborn Trade).  She is also the author of “Your Personal Financial Fitness Program,”  “Financial Fitness for Living Together,” and “Kiss the Rat Race Good-bye.”  Elizabeth writes frequently for various magazines, has appeared on numerous national radio and television talk shows, and is on the Editorial Board of MAKING BREAD Magazine.        

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