Friday, June 29, 2012

Teenagers Establishing Credit without a Co-Signer

What I mean here is establishing credit for those teenagers aged 18-19, or those in college. Anyone younger than 18 cannot legally contract for credit on their own as they are considered minors and require a co-signer. To sign a contract and have it be legally binding, you must be 18 years old or older. Very simply, credit applications are contracts where one is promising to repay money loaned.

One of the first steps in establishing credit is to open your checking account if you don’t have one.. I was surprised to learn that our credit files start the moment you open your checking account. As the nice new accounts person is getting your personal info and inputting it, their computer is reaching out to the credit bureau in the background and searching for your credit data and saying, “Does this person have any credit established?” If the bureau does not report any data back, your credit file gets established and you are given a score of 300. That is the lowest score you can have and generally signifies someone new to credit or never having credit in their lifetime. No need to panic, there are opportunities to increase your score going forward.

Now starts the task of establishing your credit and increasing your score. If you have any regular bills such as a cell phone bill, or other recurring bill, make sure you pay them on time. Failure to pay for 30 or 60 days won’t effect your credit but don’t let your utility or other recurring bills reach 90 days late. 90 days late is delinquent and can result in your debt going into collection. That can stop you from getting established before you have even started. I have seen hundreds of young adults have to struggle for years because of one or two poor decisions. Even your humble author had his share of bad credit in his early 20’s. Y’know, you write one bad check that becomes a collection and it stays with you for 7 years! Simple Fix: Pay your bills on time and don’t write checks on money you don’t have in your account. Got that?

Next, let’s save some money. Savings is an important aspect of our overall financial life. Before you get credit, get your emergency fund started. Financial Guru, Dave Ramsey, recommends that everyone should have a $1,000 emergency fund. You never know when you are going to get a ticket or may need to pay for an expensive repair to your vehicle so having this emergency fund to back you up is a necessity.

Now, let’s save some money for our credit. Huh? One of the best ways for young people to get credit is through a secured credit account. So, we are going to save money that will be used as security for our credit. Essentially, the financial institution or credit card company will hold our money for the time that we are managing the credit they grant to us. That’s how I got my start in credit. I deposited $1,000 in an account at a financial institution and they gave me a Visa card with an $800 available credit line. I had quite an incentive to make my payments; if I didn’t, they would keep my savings! I was careful and managed that card for 14 months using it and paying it down on time before I attempted to apply for unsecured credit. When I was eventually granted a new unsecured Visa card I was able to march down to the bank, pay off my secured Visa card and get my savings back.

That was 1985. Today, it has not changed very much as similar products like the secured Visa card are still available. What has changed is that secured Visa and MasterCard cards are more prevalent.  

Another secured type of credit is a credit union share loan. A share loan is an excellent way to improve or build your credit.  Luis Alvarez, a Financial Services Representative at our Hillsdale Financial Center said, “Anytime you use credit you essentially are paying for building up your credit history through a fee called interest.  Why not pay yourself some of that interest by establishing a share loan?  Share loans pay you while you pay a small interest rate throughout the term of the loan.  Here’s how it works.  Deposit a set amount of funds in a savings account that will be held as collateral for the share loan.  Meriwest will then loan you those funds and ask you to pay monthly payments back until the loan is paid off.  Once the share loan is paid off the collateral funds are released and made available to you.  During the loan term, the funds held as collateral also earn interest.  Ultimately, a share loan is a win-win loan for you and your credit.” Luis added, “Keep the share loan open for at least a year or longer so that your credit builds into a healthy report.”

“The secured Elan VISA is a great way to rebuild your credit or help you get started.” said Devon Foster, from Meriwest's River Oaks Financial Center.  “Simply, apply in one of our branches or online and send in a cashiers check in the amount of the limit you would like to have. You’ll receive the credit card in the mail and you can start using it right away. Even though your money is being held, the good credit history still gets reported to the credit bureaus boosting your score, history and your likelihood for getting an unsecured or larger loan in the future!”
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Are you interested in either of these programs? Would you like to speak to someone knowledgeable about them? You can speak with Luis Alvarez at our Hillsdale office at 408-365-6358. Devon Foster is available at our River Oaks Financial Center at 408-365-6411.


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