So heres the question. My daughter who is still in college gets the credit card offers at the bank and mail all the time. The lady at the bank tells her its to help her build her credit history. Okay, I understand needing a credit scores etc. HOWEVER. Dont you need a income to build up a credit score? Something about a debt to earning ratio? So if your going to school full time, Not really making enough money to file taxes. Isnt this building credit, just a way the bank wants to sponge off some interest off of the unwary? Please explain if Im missing something. She does have a bank acct. uses a debit card. They want to start off at 200 bucks. Sure thats not much, then again they did that to me and the wife years ago. It quickly spiraled upwards, before we knew it, we were in over our heads. Now if I cant pay cash for it, I dont buy it. Jim

I used to think like that when I first started out in a good job, never use credit, pay CASH ONLY! If you can't afford it, you don't really need it. But then came the day I really wanted to buy something, LAND! I had 10 grand in cash in the bank, the property was 20 grand, half the money, right? So when I go to a couple of lending institutions to talk about borrowing the other half to get the property (it actually had a huge barn & cement block structure with well & septic tank), they looked up my CREDIT HISTORY. What credit history? No history, no money!
That credit card deal is a scheme, but it is one of the ways of building up a credit history & a credit score for the lending insitutions (car loans, student loans, etc.) and how well you paid back what you borrowed. The only gimmick is, you need to pay CAREFUL ATTENTION to what you put on that card vs. what money you put aside to pay it off as soon as the bill comes. That is what gets you in trouble if your two sides of the tally don't match up.
You can start out by just getting a credit account at a speciality retailer (such as Best Buy) where you can only use the card there but no where else, that will limit what kind of stuff a person can spend it on. Then pay it off as the bill comes (or no interest for 6 months). That will build up the rating & history score. We have a Sam's club Discover card & primarily use it there only to buy necessities & gas, & earn 2% back. But that is money we would have spent anyway on gas & groceries.
Even though our new 46" Samsung LCD HD TV we mail-ordered was not a necessity, I couldn't pass up that 2% cash back!

I'd tell her what happened to you and your wife and how you work it out now (if she doesn't already know). Sit her down, explain how credit works, the long term effects of negative credit ratings, and if she gets it, its her responsibility. I'd also tell the CC company not to raise the limit above XXX amount until she has a good job and able to pay for the higher possible bills that could arise.

I do the same as you. If I can't pay off the amount of something I could charge, I don't buy it. If it happens to be a bigger ticket item, it still gets paid off quickly.

I don't see how a person can live without a credit card? Hotel, airline, car rental reservations, protection against a vendor going sideways on you, etc. If you buy something and the company you bought from doesn't deliver or what you received is not what was agreed upon, the credit card company will go to bat for you and reverse the charge. Try that with CASH or CHECK - Good luck! There's so many benefits of a credit card, I wouldn't live without one. It's all about discipline. Discipline to pay the card off EVERY MONTH. Charge all your typical spending to a credit card offering a reward (cash, points, etc.) and pay the balance in full each month. It's all about discipline. A credit card does help your credit score if you are smart with it. I spend over $40,000 a year on my credit card. Never pay interest. Nothing like getting vacations for free thanks to the reward points :D . Work the system, that's what it's all about. CC companies want to work you over, but it's easy to out-smart them :beers:

As far as her getting her own card to learn financial responsibility, a low limit card could be beneficial in learning
discipline.

About building her a credit score, one trick you might consider, if you have good credit or a card or two in
good standing, is to add her on to your card(s). She doesn't actually need to hold a card, but your history
will show up on her credit report as if she was a cardholder. This would give her a credit score in the event
she needed it. Kind of a running start.

My wife and I have very good credit, and early on we always made the payments (and handed over a lot
of interest, too). But if early on someone would have explained to us how credit scores worked, and the benefits
of being disciplined we might have saved a lot in interest.
We know now!

No you do not need an income to build credit only to borrow money if you don't have a co-signer...

I have an 820 credit score... :D
It took me a long time to get that kind of score.

Here is one I never heard before until I refinanced my mortgage. My broker (who was shocked at my credit score) told me; even if you borrowed money in the past and show good credit but you don't borrow money again for a long time, your credit score will go down... :confused: It is all based on reliability by not missing payments.

The key to "establishing" credit is to borrow small amounts over time and paying off the debt.

Have your daughter do this. Through the bank she uses take out a small ($300)signature loan and deposit in her savings account (open one if she doesn't have one) then make the scheduled monthly payments from that account. Do not spend that money on anything else but the loan. That way if she misses a payment they won't jack her interest rate up like credit cards do.

Once that is paid off do it again except with slightly larger amount.

SS396ELKY:

Why would you recommend taking a loan to build credit when the money isn't needed? Is a signature loan interest free? If not you would be paying the bank just to build credit and that doesn't make sense.

Jim, have her get a credit card with a low max limit. When I started I went to sears because they issue cards at low limits to young people(mine was $250). Does your daughter have a cell phone? Is it in her name, if not see if you can switch it, cell phone contracts show up on your credit report and will provide the history of making timely monthly payments lenders look for.

Having A credit card is ok. She just needs to treat it like cash. Don't charge something unless she can pay it off when the statement comes in. I hate to think what the interest rate is on any unpaid balance! over 20%, I'm sure!!

One thing to keep in mind when she needs a mortgage or car loan someday, when her income will be considered - lenders assume you will borrow 100% of the credit line on any/all active credit cards, whether there's an outstanding balance, or not, when they make their lending decisions. So a $200 credit line obviously isn't going to matter much - but if they jump it $5,000 - and she has several cards, not just one - her credit worthiness from a lender perspective could be greatly diminished, regardless of her credit score.

As long as she treats it as a convenience and for real emergencies, only - and not a life style - having one card isn't a bad thing.

My wife and I also use our cards to charge all of our monthly expenses. Anything we would normally use cash or check to purchase, like groceries, gas, cable and internet bill, clothing for the girls, whatever, we charge it. We then pay off the bill every month. I use three diffrent cards that all have various rewards programs. One is airline miles and the other two are cash back. The money would be gone every month whether we paid for them upfront or pay our credit card bill at the end of the month, so why not get 3% cash back on my money of free airline tickets?

I can't say it is because of doing just this, as we only started doing this last november, but our credit score is 81x as well. I was going to pay off my house when my mother passed with my inheritance, but my financial guy said it would be better to keep that payment and keep the credit score way up there like that than to pay it off, plus the tax issues that come with it.

Jeff

My wife works as a mid level manager for business banking in a fairly large bank. She explained to out daughter who is a sophomore in college about CC's and credit scores. Lending institutions look at credit scores for everything from loans to insurance quotes. The way to have good credit is to pay more than the minimum owed and and have the credit used to the credit available ratio high. We have a couple of cards we don't even use( emergency) with 0 balance and only use 1 other that carries a balance.
Our Daughter has a couple of clothing store cards and just got her first bank card. She is planning on using it to pay for her tuition this fall and paying it off in a week after she charges it.
Dave Ramsey's way is still the best way to pay for things though.

There are credit card companies that PREY on college kids. They get them to use the card then they start the clock on payment due when the bill is MAILED. Then they delay the credit to the account when they receive the check. Result is that they then add LATE CHARGES to the bill, eating up any payment that was made, add interest and viola!!!! you owe MORE after a payment than you did before you made the thing. SCAM............... SCAM............... SCAM. DO NOT let a college student get a "credit card". If they need money either give them cash or credit to an account with the student union, etc. This SCAM was rampant at ASU a couple of years ago.

Banks don't give a rats a$$ what you make. They'll still give you a card. I've got banks giving my wife CC's (may be soon to be ex) with obscene limts and they did it all behind my back. Her CC limits are now more than her gross yearly income.

All this cash back, frequent flyer miles when you charge is a marketing scheme to get you to use it. Because they know only 1 in 20 people are financially disciplined enough to pay the balance in full. The other 19 gets caught in their trap which amounts to GIVING the bank a portion of your salary for life.

Now they have all types of businsess backing them up. Can't make your CC payment and get behind? They ding your score and your car ins goes up. Or your not eligible to rent an apt.

No part of a credit score is based off of income, it is all based from payment history, outstanding debt, balance to credit limit ratio, length of history, etc. I don't think its necessarily bad for a college kid to have a card, but they must understand how it works first. I got my first card when I was 18, a platinum card with a 5k limit, and it was maxed within a year. After struggling to pay it off, I now have a portfolio of cards and a 750+ credit score I built completely from responsible CC use.

Another thing, if she does get a card with a $200 limit, the max balance that should be on there is really around $50, anything more could DAMAGE credit more than help. Rule of thumb is 25% balance to limit ratio.

Get a credit card and forget you have it. You don't need to run a balance on a credit card to get a good credit rating. I use my credit card once or twice a year and pay in full when the bill arrives. That is all it takes to get a good credit rating. When I went to buy a house, they never questioned my rating.
If you carry a big balance on a credit card and pay interest, the bank can see that you aren't managing your money to your advantage.

If you want her to have a credit rating, do this

Get a card (make sure there's no annual fee)
Use it once
Pay the bill on time
Cut up the card and never ask for a replacement

She'll have a good rating and be in no danger of running up the tab

Students are easy picking for CC's as most have no self control when it comes to money.

Borrowing money you don't need to borrow just to build up credit score? Sorry, no thanks. Don't play the banks' game.

bingo!

I was going to pay off my house when my mother passed with my inheritance, but my financial guy said it would be better to keep that payment and keep the credit score way up there like that than to pay it off, plus the tax issues that come with it.

Jeff

You need a new financial guy. Seriously.

If you have a habit of paying a hookers with a credit card and then immediately disputing the charges as fradulent with the CC company does it affect your credit?

And, probably more important....is it then considered rape?

oh good lord im nervous....

You need a new financial guy. Seriously.

Ditto!

Depending on your tax bracket, you're saving at most 35 cents on every dollar of interest you pay. That means it's still costing you 65 cents!

Just for a credit rating?? :confused:

Hard to imagine being able to invest the money instead in this market and do better than the avoided interest cost.

You need a new financial guy. Seriously.

lol. Maybe the financial guy also works for the company that now holds the loan. Mortgage team is now taking this financial adviser to lunch every day for the duration of the loan until someone catches on. :D

lol. Maybe the financial guy also works for the company that now holds the loan. Mortgage team is now taking this financial adviser to lunch every day for the duration of the loan until someone catches on. :D

My bet is he's a broker that gets a commission on the number of transactions he can generate and the size of the portfolio, not a certified financial planner that gets paid by the hour and doesn't have anything else to sell or other conflicts of interest.

There are credit card companies that PREY on college kids. They get them to use the card then they start the clock on payment due when the bill is MAILED. Then they delay the credit to the account when they receive the check. Result is that they then add LATE CHARGES to the bill, eating up any payment that was made, add interest and viola!!!! you owe MORE after a payment than you did before you made the thing. SCAM............... SCAM............... SCAM. DO NOT let a college student get a "credit card". If they need money either give them cash or credit to an account with the student union, etc. This SCAM was rampant at ASU a couple of years ago.

Beat me to the punch. My kids got sucked into this, also the "no-down or payments for a year buy a room full of furniture". Year came, back interest kicked in and they missed a few payments. Interest rates jacked way up. Furniture was worn out and in the the dump and they stilled owed more on it than the original price. They eventually refinanced their house to pay the debt off.

MBNA is great a letting things sit in the PO box until after the due date. I was mailing payment 15 days before due and they were still "late". Stopped when I started sending with delivery confirmation. I paid them off and it still took 6 months and two certified letters to get the account closed.

No you do not need an income to build credit only to borrow money if you don't have a co-signer...

I have an 820 credit score... :D
It took me a long time to get that kind of score.

Here is one I never heard before until I refinanced my mortgage. My broker (who was shocked at my credit score) told me; even if you borrowed money in the past and show good credit but you don't borrow money again for a long time, your credit score will go down... :confused: It is all based on reliability by not missing payments.

The key to "establishing" credit is to borrow small amounts over time and paying off the debt.

Have your daughter do this. Through the bank she uses take out a small ($300)signature loan and deposit in her savings account (open one if she doesn't have one) then make the scheduled monthly payments from that account. Do not spend that money on anything else but the loan. That way if she misses a payment they won't jack her interest rate up like credit cards do.

Once that is paid off do it again except with slightly larger amount.

Your Credit Score changes from day to day.


If you want her to have a credit rating, do this

Get a card (make sure there's no annual fee)
Use it once
Pay the bill on time
Cut up the card and never ask for a replacement
She'll have a good rating and be in no danger of running up the tab

Students are easy picking for CC's as most have no self control when it comes to money.

Keeping ONE card and using it for 10-15 years establishes better credit than using one card, never using it again and later applying for a new one. (See post above by SS396ELKY)


Respectfully,
John R.

You need a new financial guy. Seriously.

Nope

Ditto!

Depending on your tax bracket, you're saving at most 35 cents on every dollar of interest you pay. That means it's still costing you 65 cents!

Just for a credit rating?? :confused:

Hard to imagine being able to invest the money instead in this market and do better than the avoided interest cost.

It has very little to do with a credit rating, my house is financed at under 5%. A good financial planner can do better than 5% with that money, and he has continuously proven that.

lol. Maybe the financial guy also works for the company that now holds the loan. Mortgage team is now taking this financial adviser to lunch every day for the duration of the loan until someone catches on. :D

My bet is he's a broker that gets a commission on the number of transactions he can generate and the size of the portfolio, not a certified financial planner that gets paid by the hour and doesn't have anything else to sell or other conflicts of interest.

As a matter of fact he is a financial planner that carries the highest ratings (or whatever all those numbers and letters are) possible. For what it's worth, I unfortunately inherited a lot of money, an assload of money really, when my mom passed away earlier this year. That is where the tax issues come from. He broke it all down for me, and I don't fully understand the ins and outs of big money finances, but he showed me how it would cause problems for me.

Jeff

Nope



It has very little to do with a credit rating, my house is financed at under 5%. A good financial planner can do better than 5% with that money, and he has continuously proven that.





As a matter of fact he is a financial planner that carries the highest ratings (or whatever all those numbers and letters are) possible. For what it's worth, I unfortunately inherited a lot of money, an assload of money really, when my mom passed away earlier this year. That is where the tax issues come from. He broke it all down for me, and I don't fully understand the ins and outs of big money finances, but he showed me how it would cause problems for me.

Jeff

Jeff

Sorry. Didn't mean to irritate/offend you. I'm really sorry for your loss and circumstances that resulted in your having the money to invest. You need to realize though, that there is alot to making good long term financial decisions - and there are alot of less than reputable "investment advisors" out there waiting for you. What little you've said about the advice you've received so far is suspect, IMO. Yes, a good financial planner can do better than 5%, but that completely discounts the cash flow you free up by not having a mortgage payment and being able to invest the money monthly that you don't have to spend anymore on a mortgage (principal and interest) for the next 20-30 years, or whatever the remaining term of your mortgage is.

You need to make sure that the person you hire is qualified and has a stellar reputation with people you know and trust - and most importantly, IMO, doesn't sell anything but his/her expertise - not stocks, bonds, life insurance, annuities, or anything else that could create a conflict of interest and taint the advice you receive!! Whatever the hourly rate is for someone with no other masters to serve is worth it in the long run, believe me!

In my former life, I had responsibility for the Corporate level Human Resources Department of a large company, including the Employee Benefits Department and have a financial background by training (CPA). I constantly received all sorts of unsolicited offers to have these "advsors" come in and make free group presentations to our employees and retirees on how to invest their 401(k) proceeds - with the advisor's company, of course! It was a sham. These sharks were everywhere looking for unsuspecting prey. You have to be absolutely sure who you're dealing with. Do research. Understand what those "numbers and letters" mean before selecting somebody. Ask questions until you understand - on everything. Do not under any circumstances defer your judgment to one of these people, no matter how good they are! Remember they should be advisors to you - not decison makers!! Only you can do that!

'Nuff preaching! You hit on one of my pet peaves. I'll be quiet now.

Good luck with whatever you decide.

Andy

The CC companies don't care because with no income, they know a college kid can end up paying the company back thousands of dollars on what was originally a 3 figure balance.

They were brought before congress on this issue, but of course those CC companies funded so many of their campaigns that they determined it wasn't a problem.

Jeff

Sorry. Didn't mean to irritate/offend you.

Andy

You didn't do either of them so no worries. I am not going to go into my full financial situation over the internet, so I fully understand that it would be a bit difficult to grasp ones financial situation with extremely limited knowledge. I have done my homework and have been recommended to this guy by many, many who have much more money than myself.

Thats all I will say on that. The rest needs to remain personal.

Jeff

Have her watch the documentory Maxed Out before she gets a card. Its good to see what credit card companies are really all about.


There is no situation that it is better to be paying interest on a mortgage. Probably 80% of financial planners will tell you the oppisite so you need to keep looking. Sure you can make more than 5% but lets say you are making 12% on your money. You pay taxes and fees on the gain so it really closer to 9% but that 9% is invested with risk. By paying off the house if you have the abilty you take the risk factor of the market completly out.


I am a recovering credit junky and will never go back. My mortgage is all I have left and if I don't have the money I no longer buy it period.

... I was going to pay off my house when my mother passed with my inheritance, but my financial guy said it would be better to keep that payment and keep the credit score way up there like that than to pay it off, plus the tax issues that come with it.

Jeff

That's not a bad strategy if you can earn more on your cash than you are paying in interest on your mortgage. If you have money in the bank and a home that is paid for, a few points +/- on your credit score won't make much of a difference in the long run. Credit scores are a racket anyway. I have decent credit (72x), but was looking for way to raise my score. I was advised that I had too may revolving credit accounts (no balances on any of them). So, I closed all but the ones that I use. After several months, I checked my score again and it had not changed. The new advice I was provided by the credit bureaus was that I needed to show that I had more credit available to me and that I should open one or more "premium" credit card accounts -- you know the ones that charge those $150.00 per year fees.

Dave

I agree credit scores are a complete racket. Problem is they have you by the short hairs these days. A bad credit score or no credit score can screw you in a big way. It shouldn't be that way, but it is.

I recently started my own electrical contracting company. If I didn't have the credit score I do, I would have had a rougher start of it than I did. Because of a very good credit score I was able to start out with really high credit accounts at my suppliers which allowed me to buy my materials on credit and pay it off as the jobs were completed and paid for vs. only being able to buy partial materials or having to beg contractors to give me partial payments so I can pay my suppliers which doesnt look so professional.

Everything these days is based off of credit scores, I know of fellow contractors that check credit scores on potential hires.

Jeff

People get all hung up on their credit ratings. From what I've gathered any score higher than 720 gets you the best rates available. Anything higher is just bragging rights IMO. I don't even bother worrying about my credit score. If you pay your bills on time, pay balances in full frequently, and otherwise keep your nose clean from extremely high debt levels, you don't need to worry about credit scores. Besides, who cares what the score is if you have no reason to borrow money? As long as you can get the best rates, who cares if you have a 720 or a 840?

As for the credit card, have your daughter get one through the bank she has a checking and savings account (I got mine through Wells Fargo at 18 years old). Keep the limit at $300. Explain to her what good money management is. You can't hold their hand forever. The earlier she gets the concept of sound finanical decisions, the better off she'll be when she starts making real money from a job. I never got into much credit card debt. Did pay my fair share of interest. Had to have my Mom co-sign on my first new car purchase. After that, my credit score and history was good enough to roll on my own.

Another thought: What I don't understand is why high school seniors are not taught personal finance? Kids are taught history, art, metal shop, P.E., but sent out into the 'real world' with no toolbox of tools on how to manage their money. Really is quite unbelievable.

Lots of good advice here. Im going to have her read this post when she gets the time. Thanks again. and please keep up any good information. Jim

SS396ELKY:

Why would you recommend taking a loan to build credit when the money isn't needed? Is a signature loan interest free? If not you would be paying the bank just to build credit and that doesn't make sense.

It is just to establish a "History". You don't need the money so use it to start your credit history.
Bank's interest on loans are much lower than credit cards plus if you fail to make a payment on time the rate doesn't jump to 22.9%. Just be sure to pay the loan off in no less than 90 days. That is time frame (once a quarter) your credit report is updated.

A good credit history is more important everyday. Without a good report you may not get a decent interest rate. If you ever go for a small business loan without a good credit history, forget it you will not get approved. Ever shop for a new car with great credit verse fair or poor, you are treated differently by your risk level when you see the fianance manager to sign for the loan.

This is the tactic I used when I was 18 and on my own. The loan still shows up on my report.

Jim,

Don't forget about the cell phone, as others have said credit scores aren't solely based on credit cards. Service contracts show up as well.