Lifetime Lesson: Timely Tips On Establishing a Credit History


Younger Americans have a tough task these days, what with tighter credit and a sluggish job market. Even so, America’s youth still need credit.

Without credit, younger consumers might really be in hot water. According to an August 2009 survey from the National Foundation for Credit Counseling, about 50% of Americans between the ages of 18 and 34 have no savings. What’s more, 47% of younger Americans gave themselves mediocre-to-failing grades in personal finance skills on issues like household budgets and handling credit cards.

So it’s no wonder why major creditors treat young consumers like ... well ... kids. In fact, most creditors view young consumers, especially those with no credit, as “high” credit risks. That means it costs younger consumers more to borrow money (in the form of higher interest rates) than consumers with good credit histories. It should also translate into lower credit limits on credit cards.

Younger Americans are also more likely to get turned down for credit because they have no credit history (and, subsequently, no credit score). Most credit card approval programs are computer-based. If the system can’t find a credit history, credit issuers are much more likely to turn potential customers down.

So how can the junior set get in the good graces of creditors – even without a credit history? Try these ideas.

Cut a deal with Mom and Dad. With new credit card rules coming down the pipeline from Washington, Americans 21 and younger, by law, are restricted from getting a credit card in their own name, unless they can prove financial means to pay it off. One loophole is to get your parents to co-sign a card. To crest that barrier, work out a deal with your parents to take out a debit card and prove that you can use it responsibly. Parents can funnel a set amount into the bank checking account each month – say $100 or $200. If the son or daughter keeps any card spending below those limits, see if you can’t graduate to a real credit card, co-signed by your now-trusting parents.

Grab a secured card. You’ll have to earn this one, mostly by putting money down upfront, and you won’t earn any money on the interest on that deposit, but secured credit card can be an otherwise easy gateway into the world of good credit. Most banks offer them and they do allow you to build a decent credit history. Just pop the deposit over to your creditor, who in turn will give you a credit card equipped with a credit limit equal to your deposit. Since the deposit was "prepaid," you can use the card and not abuse your card by charging more than your deposit. In the meantime, your steadily building a credit history should lead to a genuine credit card.

Get a store card. By and large, getting a piece of financial plastic from a big retailer like Kohl’s (Stock Quote: KSS) or The Gap (Stock Symbol: GPS) can get you on the path to a good credit history. Just watch out for higher interest rates, and always, always make sure you pay your bills on time.

Passing a creditor’s “history” test isn’t easy. But bone up with the tips cited above, and this should be one test that pays you back with one of the best financial dividends of all – a good credit reputation.

—For a comprehensive credit report, visit the Credit Center.

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