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The Case for Building Credit Early

It's the season of debates, and speaking of which there's a lot of debate these days as to whether or not young adults and college kids should apply for a credit card. This has become more of a family decision since the CARD Act of 2009 required that those under 21 show proof of income or have a parent co-sign when applying for a credit card.

Before applying for a credit card, there are a few questions to consider; Can kids can get themselves in trouble when they have a credit card in their wallet? Definitely. Can those issues be minimized with credit cards that have low limits? Absolutely. However, in an age where building credit has become harder than ever, there's still a great case to be made for young adults building their credit early, despite the risks.

Let me share a personal story with you...

Just before moving away to college (in 2005), I got an offer in the mail for a student credit card with a low limit ($250). This wasn't the first credit card offer I'd received, and I was halfway through ripping the offer in half when my Dad stopped me and encouraged me to read the fine print. $250 limit, No APR for for 6 months, etc. After consideration, my Dad encouraged me to apply for the offer, as it might be time to begin building my credit now that I was 18.

Hmmm. Building credit? It sounded like something I should do, so I sent in my application and received my card maybe 10 days later.

Fast-forward to 2010. After moving to California careless (smart move, right?), it became clear quickly that I was in serious need of a consistent transportation option. Yeah, I needed to buy a car. And I was also going to need a loan.

After being denied for my first loan, a second personal bank advisor approved me for a loan so long as I had a co-signer. My Dad was willing to co-sign, but the logistics of two people signing the same notarized document across the country became way too much of a hassle and that loan opportunity was eventually discarded.

Finally, I turned to a local credit union and told them my situation. After running my credit report, I was approved for the loan but (I'm paraphrasing the banker's words here) "Just barely." When I asked why, she told me that despite the fact that I have excellent credit, my credit history was "extremely limited." Huh?

As it turns out, merely having a credit card doesn't catapult you to the top of creditors' lists. After the Great Recession, it takes more than one credit account (with minimal debt) to get approved for a loan. I knew I had a good credit score and had never once defaulted on a monthly payment, plus I had (albeit small at the time) documented income. So, the runaround for a loan wasn't what I was expecting at all. 

The lesson? Credit history is just as important as a credit score when applying for a loan. As a credit newbie fresh out of college, I didn't know this. And my parents, used to getting approved time and again for loans, hadn't prepared me for that either.

So, while getting a loan was a lot harder than I had anticipated, it wasn't impossible. Why? Because I had a credit history. Sure, it was small but without it, I would've been (for lack of a better term) screwed.

This is my own personal case for building your credit early. If you need a loan down the line (and odds are you will), any type of credit history will help your cause exponentially. I would absolutely recommend building your credit early, and when I'm cruising on the Pacific Coast Highway later this afternoon, I'll remember to thank my Dad for not letting me rip that initial credit card offer up... 

on Tue, 2012-10-23 10:02