The credit system in America is primed to play on your emotions, not your common sense when it comes to your money. Too many people look at the convenience of a credit card without even considering the cost of using someone else's money. Credit cards come with interest rates, most that surpass historic usury laws (loan sharking), and annual fees. Both are very common when you have a young credit history.
Put it this way, would you borrow money from a friend if he wanted you to pay back more than 15% of the original amount you borrowed, and also charge you a fee just to be allowed to borrow the money in the first place?
Before thinking you need a credit history, think about what a credit history enables you do: borrow more money at slightly better rates. It doesn't really save you money, as other articles claim. You still lose money on the deal, just a little less. But a loss is a loss.
Here is your golden opportunity to not live on your credit. In fact, think of it this way: when you rely on your credit score to obtain things you need in life, like a car, groceries, and other purchases, you are trading on your good name. While a good reputation is important, how well do you know these companies that you are willing to give them control over your good name? Welcome to the bizarre world of FICO credit scores, where they claim to reward good credit behavior but can lower your score because you paid off a balance.
You do need a positive credit history for other things in life, such as renting an apartment and even for some jobs. However, this is not only obtained through credit cards. Using credit card accounts isn't a great plan to build good credit as even with the restrictions of the CARD act, credit card companies have figured out work arounds and still impose outrageous fees and interest rates. It isn't just called revolving credit because the balances are supposed to come and go; the terms of the "loan" also appear to revolve around the whim of a company out to make money.
Instead, build your credit score with more stable banking actions and limit non-variable borrowing:
- Start a relationship with a bank or credit union as early as possible. This means open a checking and savings account, keep it in great shape (no overdrafts or falling below account minimums), and try to use the same bank for other products. Their interest rate might be slightly higher than BankXYZ down the street, but a little extra pain now will pay off later when you are a long-standing customer. Plus, their lending practices are more likely to take your full financial picture into consideration, not just the bare minimum needed to satisfy federal regulations. Your local bank has slightly more interest in making sure you don't fail on the loan than a bank you've never had an account with. If you are turned down for lending, find out the reason why and carefully consider if fulfilling the shortcomings is your better interest before seeking the loan.
- Borrow a small loan amount for a used vehicle and after one year of making regular payments, pay off the loan. To do this, you need to have the money for the car up front. This is a very smart financial move as there is no penalty for paying an account off early.
- Education loans are smarter for tuition costs than using a credit card. First, interest rates are much lower for educational loans, especially those backed by the federal government. The federal student loan program is anticipated to see an expansion during the current administration. Second, educational loans are treated differently, in a positive way, when calculating credit scores in comparison to the same amount owed on a credit card. Applying for federal student loans is a more lengthy process, but the pay offs are worth it.
Don't feel that you need to somehow convince your parents into cosigning on a credit card with you to build up a credit history. This could be a terrible idea if your parents do not have the best credit. It takes years for items to fall off your credit history, and having a joint account with someone with a poor credit history could impact you ability to get lending in the future. While it would be nice if one's credit history wasn't used for unrelated actions, such as renting an apartment, the reality is everyone needs a good or great FICO credit score. The way to get a great FICO credit score doesn't necessarily require credit cards to achieve.
