12/28/2018
How I Helped My Teenager Build Credit Responsibly
My daughter is 19 years old and her credit is better than mine š¢
When I was growing up my mom didnāt talk to me about money. So I never understood the importance of paying my bills on time, having good credit, or saving money. So I had to learn the hard way through the School of Hard Knocks; through endless NSF fees, 24% interest rates, 3 repossessions, and 2 evictions (but God).
My goal is for my daughter not to have to follow in my footsteps so since she turned 16, Iāve been teaching her how to budget, save, and build her credit responsibly. Iām also preparing her to one day be able to buy a place of her own because the word says that āa good man leaves an inheritance for his childrenās childrenā Proverbs 13:22.
I want the generational curses of poverty and lack, of ānot having enoughā or āhaving just enoughā to be broken over my family starting with me.
So how did we do it?
1. She got a job - You canāt get credit (which is the ability to borrow and pay back at a later date) without a job. How will you pay back what you borrow?
2. She opened a checking and savings account - In order to show lenders that she was responsible with managing her money, we opened her up a checking and savings account and set up her paychecks to be direct deposited. Since she was a minor when we went to open the account, I had to be on the account with her until she turned 18. We decided to go with a PNC Virtual Wallet account which is made up of a Spend account (your primary checking account), a Reserve account (for short-term savings) and a Growth account (for long-term savings).
3. We requested a free copy of all three of her credit reports using AnnualCreditReport.com - Even though sheād never applied for credit before, itās a good idea to order the reports to check for:
Mistakes ā be sure her personal information like her name, address and Social Security number is correct. Also we checked to see if the report contains accounts she did not open or debts that didnāt belong to her.
Signs of identity theft ā like accounts she never opened, that are listed as late or unpaid.
We we received hers we were surprised to find two items not belong to her on there so we disputed them and got them removed.
You can also monitor your credit score and report using free services like CreditKarma and NerdWallet. Note that checking your credit reports will not harm your credit score. Keep in mind that these services provide you with your VantageScore, not your FICO score which is what most lenders use. Also keep in mind that your score will be different depending on the type of credit you are applying for (i.e. mortgage, card, credit card, etc.) because each lenderās algorithm for determining creditworthiness is different.
4. She opened up a secured credit card with an āAā lender using her own money - When she turned 18, I removed myself from her account at PNC and went with her to open up a $300 secured credit card using her own money with PNC. Why an āAā lender? āAā lenders,ā or traditional lenders, refer to banks and credit unions that cater to customers with good credit scores and a reliable income. Then there are "Bā lenders also know as subprime lenders who offer a lower barrier of entry to qualifying for their products but can offset that with higher fees and interest rates. In short, they cater to people who may not qualify for say, loans or a credit card at one of the big banks, because they lack either a strong credit history or a guaranteed income (self-employed, for instance). āAā lenders tend to impact your score more positively than subprime āBā lenders.
5. She paid on-time and stayed under 30% utilization - 65% of your score is made up of your payment history (paying on time) and credit utilization (how much of your available credit are you using) - 357.50 points to be exact. So to ensure that she made her payments on time we set up automatic payments of the minimum balance so she would never be late and she never charged more than $90 at a time ($300 credit limit x 30% utilization is $90).
6. She opened up an unsecured credit card - After 6 months of proving she could handle credit responsibly, she applied for an unsecured credit card through Capital One and was approved for a $300 credit limit. $300 isnāt a lot but if she pays the minimum payment on time for 5 consecutive months she is eligible for a credit line increase. We choose to go with Capital One because the approval odds were high according to Credit Karma.
7. She worked out payment plans with creditors - having Sickle Cell Anemia meant that she could rack up a ton of medical bills in no time despite having medical insurance. So to keep her medical bills from going to collections and being reported on her credit report, we called and made payment arrangements with each creditor ranging from $10-25 per month.
That's it. Thatās all we did. Good credit isnāt magic, its math.
