How To Build Credit

Human beings are the only creatures that have to pay to live on the earth. As such, there will come a day when you will either have to pay rent or pay for your mortgage. Unless you just come from money, this article doesn’t apply – you have special circumstances. As dads, we need to teach our kids all about loans and credit. Ah, but you may ask “how do I teach my kids about building credit?” Here’s what papa says: teaching your kids how to build good credit is easier than you think.

There are thousands of how-to guides out there on the internet about building credit. Many are trying to sell you a program, or they get affiliate money by pushing a certain product. I’m going to tell you exactly how I’ve helped dozens of young adults build their credit scores and won’t make a penny off any of the banks or credit cards I’m about to share with you.

As with any financial advice, please take the following tips I share at your own risk, and seek professional financial guidance as I am just a regular dad.

I have used the following plan with many 18-year-olds with great success – my son included. This is the gist of the process:

• Need to be 18 years old
• Open a checking account
• Sign up for a credit card

Looks easy enough, right? Well, there are some additional important details for each step that I will go over.

My son, for example, opened his checking account with Regions Bank as a student checking account as soon as he turned 18. This is a free checking account with no fees and there is a branch in our community. He took a couple of hundred dollars (mostly Christmas and birthday money) and deposited it into the account. An important step here is to NOT get a debit card but instead get an ATM-only card.

When you have a debit card you tend to spend whatever you have in your account. The goal is to spend on your credit card instead to help you build credit. More on that in a minute, but remember, NO debit card.

The next step was to sign up for a credit card. The best fit for my son was a student Discover card as it is unsecured and gives cash back. Many times when you are first getting a credit card you can sign up for one that is secured – that is, you send in say $500, and then your credit limit is $500. However, you have to come out of pocket for that money in the beginning. An unsecured card is one where you don’t have to pre-pay any money to generate a limit.

When my son signed up for his student Discover card he was given a $1,500 limit right away without pre-paying any money. Now here’s another tip: pay for everything every day with the credit card, but only up to your ability to pay it off every month. If you have $500 in your checking account, don’t spend more than $500 in a month. This is where not having a debit card will help because the ultimate goal is to build credit, right?

However, it’s not enough to just pay it off every month. Make sure to send in the full payment so that the credit card company processes your payment about a week before the due date. Be sure to pay the full amount! Do not make the minimum monthly payment or you’ll just be in debt forever. There is a bunch of math and science that go into this method, and I’m not the sharpest crayon in the couch cushion, but this method does work.

Now the goal is to follow this method for the next six months. After six months you will have enough history of putting charges on a credit card and paying it off without any interest. Every time I’ve helped someone with this plan they wind up with a credit score of ~740 after six months. This will qualify them for the best or second best interest rate for any loan that they may apply for, and will also help with their car insurance cost.

So this has been my tried and true method. What has worked for you? Are there better ways to build credit fast and achieve a higher score? Maybe you have some warnings to share to prevent others from making a bad mistake.