I’ve been blown away by your responses to the new Ask the Readers feature, especially to yesterday’s question about what do do if you have no credit history. Here’s a story Derek e-mailed me about his first-hand experience safely building his credit score.
I am a college student, and I have a credit card. My parents and I have worked out a system for protecting me from possible credit card debt. Our system only worked because both my parents and I are very careful financially, but I think it might be useful to others out there, perhaps to parents with a son or daughter about to enter college.
The credit card was mine, and I could do whatever I wanted with it, but the bills were mailed to my parents’ house. Every month, they would pay the bill on time and in full, and then I would be responsible for reimbursing them.
This had several advantages.
- It allowed me to build up a perfect credit history, which will be useful down the road.
- It protected me from credit card debt — even if I had made a mistake in my spending, my credit limit as a college student is low enough that my parents would still have been able to pay the bill in full. I would of course have had to deal with very angry parents, but my credit score would not have been impacted, and I would not have gone into debt.
- Even though my address changed frequently because of holidays and moving to new residences, I never had to worry about changing my address with the credit card company because the bills were always sent to my parents’ house.
- If my parents agreed to pay for something I needed, such as school supplies or food, I could simply charge it to the credit card, and they would in turn agree that I didn’t have to pay them back for that portion of the bill.
I will graduate next semester, and without the safety net my parents provided, I have canceled my credit card, even though I was always able to use it responsibly. This was a good way for me to go into the “real world” with a perfect credit report, which I am sure will turn out to be a great asset.
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Now I’m 24, and I still have little/no credit history.
I’m guessing that either because they paid the bills or they were the primary account holders, I wasn’t really figured in.
Perhaps one needs a joint account? Still unsure.
So I caved and got a Macy’s card. I buy a piece of clothing every month or so, or something small, and pay it off.
The manager of my local bank came to my work the other day, and said that I could open a joint account if my parents signed as a guarantor.
So I visited one of the branches and the teller had no space for a guarantor on her little computer screen.
I have yet to go back and chit chat with the manager…
Been busy working on that budget
Thank you for all your work/spreadsheets.
-HijabMan
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That’s a great story, right up until the point where Derek canceled the credit card.
Canceling the card also canceled his credit history with that card, so unfortunately now Derek has no track record again, unless there are other creditors we don’t know about.
Still, it’s a great idea… I would just recommend that future users of this system not cancel the card…
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This is a useful story Derek – thanks.
One quick comment: it’s worth noting that the term “perfect credit” can be a little bit misleading. A credit history where credit has been used but no late payments have ever been made is not guaranteed to give you the best possible score.
In fact, part of what allows a credit card to help give you a good credit score is having had it open for an extended period. So, while the situation you described is certainly much better than nothing, it would have improved your credit further to have left the card open (even if, say, you didn’t even use the card over the next 5 years – you could cut up your copy and leave the address set to your parents so that any new cards go to them).
But, despite this little point, still definitely a big step up from nothing – thanks for sharing!
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That was a good plan in starting at least. Should have done more research in how a credit score is calculated because cancelling a card that was used like that will only hurt your credit score and without any other mechanism for building credit Derek will go back to having a ‘thin’ file and will have trouble getting credit again in future.
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You shouldn’t cancel the card. I have heard this can change your credit score.
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Great idea.
For people starting out, another way to keep a reasonable limit on spending while building up a good credit history is to limit credit card spending to gasoline purchases.
It’s one specific category (easy to glance at your statement and see that it’s all in line)
You generally have to buy gasoline anyway (it’s a need, not a want)
It’s not an area where you can really go “overboard” (you can only fit so much gas in your tank)
For teenagers, car gas is usually a spending area that parents cover anyway, so if the family wants to go the “parents cover the credit card payments, but the card is in the child’s name,” it fits with the general family spending plan
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Would canceling the card really affect his credit score that much? Isn’t part of the point of having a credit score that it isn’t tied to one account or credit card? Can someone point to an article that backs up the “hurting your credit” claim?
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When I was 16 and got a checking account in my name, my bank offered a “linked” credit card. If I did not pay on time. The amount was deducted from my checking account. It only had a $200 limit for 2 years, then $500. That set me up for great credit.
I recommend people get a credit card that offers daily balance emails. Then they “prepay” the amount they can afford to spend each month and don’t use it when they reach zero. It is really about self control more than anything.
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Canceling the credit card did not help him in any way. The best way to help your credit score is to build credit history. Having accounts that stay open for a long period of time with a history of on time payments show effective credit management. There is a great article at: http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1098274211,85485,
that I suggest checking out. While there isn’t anything that shows canceling the card will help you … there are very few people that canceling a card will help, except in extreme situations (e.g. more than 7 revolving credit accounts).
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Allow me to clarify a few points:
-I was the primary account holder of the card, which is why the credit reports were assigned to me; it sounds like people should probably check with their particular company to make sure that this system will work.
-Thanks for all the advice about canceling credit cards. I found an article which attempts to explain how canceling a card affects your score.
The truth is, what actually happened is a bit more complicated, and I didn’t feel it was relevant for me to explain the whole thing in my submission.
My credit card company changed the terms of my contract, and one of the terms they changed allowed them to use any means available to them to track down my cell phone number and make marketing calls to it. I didn’t feel that I had to agree to annoying phone calls on my cell phone, so I used their opt-out procedure, which will cancel my card when it expires. By that point I will be in graduate school, and will have already applied for any educational loans that I will need, so I will still get the benefit of my current card’s history.
However, the information you folks gave was very helpful, and I will certainly keep that in mind when making decisions about credit cards in the future.
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Charlie: http://www.bankrate.com/brm/news/cc/20020102a.asp
“If your goal is to improve your credit score, closing accounts is not a good tactic,” says Craig Watts, consumer affairs manager for Fair, Isaac and Co. based in San Rafael, Calif. “Paying down credit cards is terrific. Closing them is not going to help.”
Canceling a large amount of unused credit could actually hurt your credit score.
http://www.fool.com/investing/small-cap/2004/08/30/beware-of-canceling-credit-cards.aspx
Closing open accounts may actually hurt your FICO score. Lenders take a hard look at the ratio between the balances on your revolving accounts and your total available credit. If you do have debt, try to keep it to less than 30% of your available credit. (The ideal number here is, of course, 0%. Here are some tips to get you debt-free faster.) Go ahead and keep those lines of credit open (but don’t be tempted by untouched lines). When you close open accounts, those credit lines are no longer factored into your ratio. Thus the percentage of debt/available credit will increase. Ouch.
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I’ve done exactly what Charlie is talking about.
As a junior in college, I did a lot of driving for my summer job. Instead of buying it with my debit card and withdrawing the amount directly from my account, I got a credit card that I use solely for gas purchases. I still write the transactions in my debit card mini-checkbook (those things are GREAT for students!) as a purchase, so I don’t spend money later that I’ve all spent elsewhere. That also guarantees that at the end of the month when I pay the bill, I know I’ve got the money in my debit account to pay the bill. Then, I simply check off the transaction’s “processed” box in my checkbook, and I’m set.
It’s a great way to build a credit history with very little risk. As long as you’re diligent about tracking the purchases so there’s no “surprise bill” at the end of the billing cycle, it’s very easy to do safely.
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Explain to me how this actually helps the guy establish good spending practices?
I understand the benefits of this system and how it might help establish a good credit history, but it really teaches him no financial responsibility.
Sometimes that fear of screwing up or truly screwing up is the best way to learn. If he is young and just getting out of college, what is the harm of a little debt and learning to deal with the mistakes you made? I think his parents did him a disservice through this arrangement.
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I totally agree with everyone that he shouldn’t have cancelled the card and I think this is an example of how everyone should be a little more educated as to what exactly ‘credit’ and your ‘credit score’ are and how they are used. It’s not just if you pay your bills on time.
Besides that, I think that the plan implemented is a great one. I wish my parents had done that with me because there is a side effect that Derek didn’t mention: Your parents see your bills. As a college student there are often times that you are tempted to spend your money on things that your parents may not be too pleased with… Talk about a quick way to run up debt! Nice protection by having the bills sent to the parents.
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“a system for protecting me from possible credit card debt”. Come on! Credit card debt is not something you need “protection” from. It isn’t a disease or a terrorist threat that you don’t have personal control over – you decide how much you want to spend, end of story.
Can anyone take personal responsibility any more? Spending too much money is your fault, not the fault of the credit card.
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Its a great idea, although I would have hated for my parent’s to see my spending. Even though my bank account was at my dad’s branch (he was a bank manager at the time) and he could have looked at my account at any time, I would have felt very uncomfortable with them opening my bills.
Wierd, huh.
Oh, and although cancelling the card probably didn’t help his credit card, after seeing the whole picture I get why he did it.
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That sounds like a nice way to build credit, but what about the rest of us who don’t have parents that would do such things?
I don’t, and I’m building up my credit just fine. Every month I use it to buy $30 to $15 worth of minutes for my pre-paid cellphone(how much I buy depends on how many minutes I have left) I figured since its something I’d be buying every month in full as it is, it would be a good purchase to use to help build my credit.
And why is he insistent on cancelling his credit card once he gets out of college? Sounds to me like someone realized the card would really become his responsibility when he graduated and didn’t want to accept it.
I think he should keep his credit card, and learn to use it wisely, for reasons besides keeping his credit score.
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I used a variant of this system – The card was entirely in my name, but I only used it for things my parents had agreed to pay for (trips home and school-related expenses, basically.) There was *something* on it every month, but they paid it on time, so I had a pretty good credit history after three years. Meanwhile, all of my *own* purchasing was done on my debit card – which my parents never saw.
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without the safety net my parents provided, I have canceled my credit card
Okay, besides the fact that by cancelling his sole credit card he probably borked his supposedly “perfect” credit history for a while, the statement about the safety net had me confused? Did the guy learn anything about the responsible use of credit cards or not? Seems like the only thing he learned was that if his parents aren’t going to be there to bail him out he’s better off not having a credit card. Grow up already! He’ll learn the hard way that you cannot be a credit card snob in this country (the US) and expect banks to lend you money at any reasonable rate. The days of doing business with a handshake and “your word” are over. When you go to the bank to get that mortgage for your first house the bank will want to see an extended credit history if you expect them to offer you the best rates.
It’s just like the recent “Ask the Readers” question about trying to build a credit history while eschewing credit cards. Yeah, you can do it with convulted schemes involving personal loans and such, but that costs you money. You should not have to pay anything for a credit history. Credit cards can be free if used responsibly and build a credit history just as well as taking out a loan and paying interest on it. In fact, many cards nowadays pay you cash back. I’m happy to note that I have not paid my credit cards a cent of interest in the past few years and have collected hundreds of dollars of “cash back” rewards.
Ahhh, to be young and uninformed…
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I had the same system set up, but was only allowed to use my card for food, books, school supplies, and gas. It was paid in full every month, and after 4 years, my non-existent credit went from a $500 limit to $10k.
After graduating I got a rewards card (with no fee) to take advantage of the points earned on bills I have to pay monthly anyway. I kept my first card open because of its large limit, but never carry it and never use it.
Great story, glad you shared it. It works really well!
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Great advice, but the credit card cancellation was a major “no-no”. I’ve heard far too many blowhards (but it seems everyone on this site has it right) talking about “credit”, so let’s set the record straight right here.
Your FICO score, which is better known as your credit score, comes from a company that was started back in 1956 called Fair, Isaac Corporation, the creator of the credit scoring system. This system scores people based on how good or bad they are at managing your debt. Your score reflects whether you pay off your credit card balances each month, whether you pay other bills on time, how many cards you have, and what percentage of your credit card limit you use each month, as well as a number of other algorithms that they call their secret sauce. All that information is provided to them from the three credit bureaus that track just about every financial move you and I make.
In reality there are essentially only six ranges of FICO scores that count. Starting from high to low here they are:
850-720
719-700
699-675
674-620
619-560
559-500
Your FICO score is made up of 5 main components:
1. Credit inquiries make up about 10% of your score. Multiple inquiries can be seen as a negative if several credit cards are applied for at one time, especially if other accounts are close to their credit limit. Several inquiries within a 14 day period for a specific loan are only counted as one inquiry.
2. The types of credit you have is about 10% of the score. The stricter the credit requirements of your lending institution, the better it is for you.
3. The length of your credit history is about 15% of your score. The longer your credit has been established, the better it is for you. Opening new accounts and closing proven accounts can bring down your score.
4. Your everyday credit use constitutes about 30% of your score. Lower balances on credit cards is better than higher balances closer to your credit limit.
5. Your past payment history is around 35% of the score. The fewer late payments you have, the better your score will be. Recent late payments will have more negative impact than credit problems in the past.
The Biggest FICO Blunder? Closing down your credit cards. Fifteen percent of your FICO score is made up of your credit history. Your credit history is how long you have had credit. When you cancel credit cards, you may be canceling a big part of your history.
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Slightly more complicated but possibly worth it:
Get a credit card. Limit the purchases to a category (food, gas, food and gas, books, whatever). Everytime you make a purchase, deposit the amount of the purchase into a savings account (I recommend ING, but anything works, just make sure it earns at least 3 or 4 percent). DO NOT buy something if you cannot deposit that amount into your savings account. You will earn interest on the credit card companies free one month loan to you. At the end of the year, total interest might only be $40 or so, but who cares, you basically got that for nothing. This is what I do (though I only wish my parents paid the bill. I put gas, food, and necessary school supplies on my card. I have a $1,500 credit limit through Bank of America and I’ve been building my credit and saving interest for 2 years now) and it’s cool cause I feel like it’s free money (admittedly not a lot, but free nonetheless). I love this website.
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I am not an expert with credit cards. In fact I only recently obtained my first in the last six months. I’ve been following this site and several others and listening to the advice given by individuals (which I’m very appreciative for), and have come to realize that I have some of my own advice to give for first time creditors.
1. Try to get a credit card from the same institution as your checking account. I haven’t come across anyone really covering this topic, but for first time creditors I would highly recommend it. It makes it very simple for me to make payments this way. I can see how much I have to pay right next to how much money I have.
2. I really like everybody’s ideas about the consistent payment approach, and I plan to use it on my utility bill. I don’t have a car, but I do have a utility bill that could be easily paid through credit, and then repaid via my checking account. The greatest part about all of this is, everything in this day and age can be set up automatically (made even easier if your checking account and credit card are from the same institution).
3. I also use my credit card for BIG purchases. Although this may sound risky, it has worked great for me thus far. The trick is to save and plan for these purchases before they’re made.
4. As far as the little everyday things, I personally am not comfortable purchasing that stuff on credit yet. I wouldn’t recommend using it for dates, or movies, or eating out, or anything of the like. Maybe somebody else is, but I feel as though thats really where the landslide effect comes in. Limit your purchases to one or a few easily affordable relatively consistent purchases a month, and the occasional big purchase that you planned in advance for.
If Derek’s plan worked for him, then that is fantastic news. Unfortunately, that is not the case for all of us. My problem came in where my parent thought it would be a great idea to help me start building credit. Being young and lacking knowledge of the subject, I signed up for a joint account with her. That came back to haunt me four years later when I tried to then apply for my own credit card, and was denied. I thought at first I had my identity stolen! When in fact I found out that it was not stolen, rather my own parent was not a good creditor. Luckily I was absolved from that history based on the case that I was a minor when originally placed on the account, but it still took me 3 weeks, 10 headaches and 30 phone calls to make it all right. In personal experience, I would recommend trying to make yourself as financially independent from your parents as possible, but doing it over a gradual period of time. I slowly have been assuming more responsibility from my parents over the past few years. This is a great plan and easy to do for any college student. Every few months or so, I take on another new financial responsibility, and help my parents out in doing so. I get the benefits of learning how to be responsible, and they have that much less to pay for every month.
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Option to make telemarketing calls to your cell phone? I’d cancel that card too! No Way! (see Derek’s follow up comment #10)
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The problem I see with the above plan is that you don’t develop the regular habit of checking your statement and paying bills directly.
If you keep a enough money in your bank account (and you should) it might be better to just pay online. It cuts out your parent’s extra steps and you develop a good habit of paying bills monthly.
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