I vividly remember sitting around in my apartment as a college junior discussing finances with a few friends one day. All of us in the room had student loans except one person, and most of us had credit cards. Chad was kind of bragging about the fact that he didn't need to take out student loans, didn't have a credit card and paid cash or used his debit card for everything. He thought this meant that he had good credit, because he wasn't in debt at all. Even as a 20 year old, I realized his logic was flawed. Maybe this is when I should have realized I was destined to be a bankruptcy attorney. I chimed in, “It’s great that you don’t owe any money, Chad, but you have no credit history, no way of a lender proving that you have a good track record of paying things. That is not a good thing.” The conversation moved on and Chad brushed off my comment.
A few months later, Chad went to buy his first car. He was looking to get a small loan for a modest used car and, lo and behold, no one wanted to lend to him! The lenders said he had no credit history and they had nothing to go on to determine whether he was a good credit risk. Luckily for Chad, his mother co-signed for him and he was able to get the car loan. I can’t remember, but if I had to take a guess, I would say that I told Chad, “I told you so,” when he told me about his car shopping experience.
What could Chad have done to avoid his car financing woes? The reality is that Chad was lucky that he didn't have to use student loans and could pay cash for everything. It would have been stupid for him to go into debt just to build a credit history. However, he could have strategically used a credit card or two to build his credit without actually going into debt.
If I knew then what I know now, I would have recommended that Chad get a small credit card of his own, use it a little bit each month for something he would buy anyway, like gas or groceries, and pay it off each month. It is a myth that you have to carry a balance on your credit card from month to month in order for your credit card usage to have a positive impact on your credit.
Another option Chad could have explored is to have his parents add him to one of their credit card accounts as an authorized user. Without even using the account, Chad could reap the benefits of his parents’ responsible credit usage and establish a positive credit history. Speaking from my own experience, I can tell you that this can be very helpful in establishing credit. My mom was kind enough to add me as an authorized user to a credit card account of hers when I turned 18 in order to help me establish good credit and it worked wonders.
However, Chad would not want his parents to add him to their account as an authorized user if there was a concern that his parents would not make the payments on time as this would cause him to establish bad credit history from the start.
These tactics are not only useful for young people looking to establish credit, but also for people looking to reestablish credit. It is the first inclination of most of my bankruptcy clients to want to avoid credit all together after completing a bankruptcy. This is completely understandable, as they don’t want to get into trouble with credit again. However, if they don’t responsibly use credit, their credit history will stay poor. With your credit score impacting not only your ability to borrow money, but also your ability to obtain employment and your rates for things like car insurance, everyone needs to be concerned about building good credit.
Whether you are a young person trying to establish credit for the first time, or a person who has recently completed a bankruptcy and are looking to reestablish your credit, it is important to know how to do so effectively without having to go into debt. Charging a small amount on a credit card and paying it off every month is the best way to do this. This strategy allows you to establish good credit without the burden of debt. If you are in debt already and would like to find out how to get a fresh start through bankruptcy so you can employ this tactic to rebuild good credit, give Steidl & Steinberg a call at 800-360-9392. We look forward to hearing from you.