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5.19 blog

What Do I Need to Know About Credit Reports?

Credit scores, credit reports, credit bureaus — you hear these terms thrown around on TV commercials, but what do they really mean for you?

Think of it like this: your credit score is kind of like a quick snapshot that shows lenders your financial reliability. It affects your ability to get a loan and determines how much you will have to pay to borrow money.

The most reliable and widely used credit score is the FICO® score. It is used by 90 percent of lenders, so this is the credit score you should always look to pull. FICO scores range from 300-850 — the higher the score the better.

Where can you find your credit score?

That’s where the credit report comes in. The Federal Trade Commission allows every person in the United States one free copy of their credit report every 12 months. That includes one report from each of the three nationwide credit reporting agencies — also called credit bureaus — which are Experian, TransUnion and Equifax.

What’s the difference between the three bureaus?

Each bureau serves the same function (to keep information about your credit history) but they remain independent of each other, sort of as a way to keep the whole process honest. They generally all have the same info on you but not always. That’s why the individual credit scores can differ from one another. You can pull all three reports at once to get the clearest picture of your overall credit health, or you can stagger them over the course of the year to see how your credit score has fluctuated and keep an eye on accuracy.

Where should I pull my credit report?

The only authorized website where you can obtain your free credit report is annualcreditreport.com. Since you will be providing personal data like your social security number, it’s imperative that you use a trusted site for this service and this resource is recommended straight by the US government.

Keep in mind that you can only pull your credit report if you have accumulated enough information. That means you must have at least one account that’s been opened for a minimum of six months and at least one account that has reported to a credit bureau within that timeframe.

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5 Things to Avoid Buying with a Credit Card

As much as you try to reinforce to your teens that credit cards are an adult responsibility that should only be used with proper planning and budgeting, it’s hard to deny the magical aspect of using a plastic card to buy things you need or want without having to fork over cash at the time of purchase.

The concept that you will be paying for this later, and sometimes paying more if you cannot make monthly payments and incur high interest rates, can be a difficult concept to grasp for even seasoned credit card users. Make sure your teen knows what NOT to pay for with credit cards to ensure they don’t fall into a pit of debt as soon as they head off on their own after graduation. It’s easier than cataloguing the numerous items they can buy with credit, and will at least safeguard them from buying expensive items they will never be able to realistically afford.

Here are five items your teens should never pay for with a credit card:

  1. Tuition: 

Yes, a college education is important, if not a requirement for success these days. Trouble is, the cost of college tuition is perpetually on the rise and college students are still as broke as they always have been. Due to the exorbitant costs of education, most teens receive financial help either from their parents or through scholarships and loans. But if your teen is responsible for even a portion of their tuition, they should not use a credit card to pay the bill. Many schools will add a convenience fee (roughly 2-3%) for paying with a credit card. On top of that, the amounts are so large your teen wouldn’t be able to pay off the credit card before having to start paying interest on it. If your teen is having trouble paying tuition on time, talk to the school and find out about the types of low-interest student loans, grants or work-study programs that are available to offset the cost.

  1. Vehicle:

Not every auto dealer will accept credit card payment, but the ones that do will likely charge a transaction fee of 1-2%. When you’re buying an expensive item like a car, 1-2% can add up to several hundred dollars. Also, the chances your teen has a credit card with a high enough limit to handle the initial down payment on a car are slim. More than likely, your teen would max out their cards, negatively affecting their credit score. Instead, consider borrowing from a bank or credit union. Interest rates would be around 3-4%, compared to 15% rates your teens would endure on the average credit card. Another benefit of receiving an auto loan is adding it to your credit report, which helps the health of your credit score.

  1. Medical bills:

The cost of healthcare is not cheap and paying for it with a credit card will add high interest rates to the overall bill. Your teen could wind up digging an early debt hole that could affect their future finances if they go down this road. Contact a hospital’s financial department to help your teen set up a payment plan. This result in smaller or no interest charges and give them a clear road to paying off the balance completely.

  1. Taxes:

If your teen needs to file taxes and ends up owing money to the IRS, they should not use a credit card even though it is an option. Like vehicles, taxes can end up being a large dollar amount and tax preparers will charge a convenience fee for using a credit card. The 2-3 percent fee could tack on a good amount of added money if the initial amount owed in taxes is high to begin with. Plus, interest rates on credit cards are other higher than what the IRS charges through its range of payment plans. Speak with the tax preparer to figure out the best way your teen can pay taxes or contact the IRS ahead of time to work out a payment plan.

  1. Business startup:

So your teen is using their education to begin a business. Excellent! But they use a personal credit card to expense their venture to get it off the ground. Not so excellent. This tactic is risky because it generally takes a few years for business to become profitable. In that time, your teen will pay high interest rates on those costs, effectively negating any profit from the business. Small business loans are more suitable in these situations.

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Help! Should My Teen Have More Than One Credit Card?

Now that you’ve made a decision to get your teen a credit card, and you know some of the best credit cards out there for teens, the next logical step is considering how many of those cards should be in your teen’s wallet.

This info isn’t just important for teens — but parents, too. In fact, despite the resistance from most teens to take parental advice on all matters of life, 3 in 4 teens will turn to their parents for financial guidance.* So it’s crucial that you understand how many credit cards a teen should have so that when they come to you for advice, you’re able to give it.

While one school of thought advises holding no more than two personal credit cards, others suggest opening up to eight, spread out over time. The number of cards you ultimately decide to open should depend on your situation and needs (the U.S. average is three to four). Let’s get started with the basics to help you and your teen make an informed decision.

The Good

Rewards! Different cards offer different incentives, so if you find you’re using your card primarily for gas and not receiving rewards for it, perhaps it’s time to open a card that does. Sticking to this philosophy, you might open up several cards, using each one exclusively on the item that awards bonus points or cash back. This way you can rack up rewards while simultaneously making it easier to track your finances.

For teens that are looking to buy a big-ticket item, opening a new card with a long-term 0% APR period allows them to pay it off slowly without added interest. They’ll finally be able to buy that phone, video game system, or even a car and learn how to budget their money to responsibly make the monthly payments. That’s a win-win!

The Bad

This is every parent’s worst fear: Teenager gets credit card; teenager buys item outside of budget range; teenager can’t pay monthly balance; teenager incurs massive late fees; teenager’s credit score suffers; parent must come to the rescue. Unfortunately, this scenario does play out among countless teens. In a rush to grow up, teens can dive head first-into the privileges of adulthood ill-prepared for the consequences.

Opening one credit card for a first-timer requires a lot of learning and responsibility. Having to manage multiple cards is confusing and can wind up costing a pretty penny if bills are not paid on time. With all the compounding fees, a credit card holder could end up having to shell out more money than they have, and credit scores could plummet to levels worse than someone with no credit at all.

The Ugly (Truth)

The way the credit bureau system works isn’t straightforward. In fact, it may seem counterintuitive, especially for teens who are unfamiliar with the ins and outs. In short, if you want to build and maintain good credit standing you need to have debt. Yup, that’s right. Debt is good — sort of.

You need to prove that you are a reliable borrower, which means using your credit card regularly and paying it off, while proving to be somewhat of a risk. Remember, this is a business and lenders are hoping to make money off of you! If you never use your credit cards, lenders see little value in you as a source of income.

For those who wish to play the credit game by maximizing the amount they can boost their credit scores helps to have more than one credit card. As a borrower, you are looked upon favorably if you use some but not all of your available credit. So instead of using $900 on one card with a $1,000 limit, open three cards with $1000 limits and use $300 on each. It might not be abundantly clear why, but trust us when we say it will increase your credit score.

Boosting your teen’s credit score is tricky. We don’t recommend trying to do it all at once. Instead, focus on the most important aspect of a credit score: paying bills on time!

(* Source: Survey conducted by The Futures Company on behalf of H&R Block Dollars & Sense.)

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Five Ways to Help Your Teen Boost their Credit Score

By Jaime Ervin, contributor

When your teenager ventures out into the real world, there will be many financial and lifestyle options that will be made available—or unavailable—based in part on their credit score. The quicker we can get teens thinking about credit and understanding how to use it, the better off they’ll be as they strike out on their own.

While your teen may not be ready to have their own American Express card with an unlimited credit just yet, there are steps that you can take now that will help them boost their credit scores.

What’s in a Score?

Knowing what makes up a credit score is important. Encourage your teen to make the connection between financial behavior and consequences by explaining to them the components that factor into their credit score: length of history, credit usage and payment history, for example.

Many adults don’t understand everything that goes into their credit score, so helping your teenager to understand even the basics will go a long way.

Set Credit Goals

The concept of a “credit score” may be somewhat ambiguous to a teenager—after all, it can seem like just a random number, even to adults. Help them make a connection to what big-ticket item that boosting their credit score will help them with—which for most teens is a car.

Making their goal tangible will help them stay on track toward a great credit score and getting a good deal on their vehicle financing. Show them concrete examples of how a good credit score can mean better payment terms and lower interest on their car loan.

Use Credit for the Right Reasons

It should be made very clear to teens that they should use their credit to make life more convenient, not to spend more money than they otherwise would. If you wouldn’t spend it in cash, don’t put it on the credit card. Because so much of their score is based on usage and payment history, it’s important to not overextend.

On Time, Every Time

One thing that will help teens get their credit score up and keep it up is making all payments on time. Starting good payment habits early can set teens up to be responsible credit users as adults.

Keeping even one account from going into delinquency or collection can save them a ton of points on their score, and thousands of dollars in finance charges and increased interest rates on loans. 

Lead by Example

It is so much easier to get ahold of your own credit score now than it ever has been. Use the availability of your own information as a teaching tool with your teen. Pull your credit and look at it with your teen. If your credit is superb, you can give them advice about how it is saved your family money to be in that position.

If your credit looks a little rough, use it as an opportunity to talk with your teen about how to stay out of financial trouble. Have a frank and honest discussion with them either way, and let them know that building (and fixing) your credit is a marathon—not a sprint.

Above all else, keep it light and interesting for your teen. The last thing you want is for them to tune out on such an important part of their financial life. Help them get excited and follow up with monitoring by checking their report with them a couple of times a year so they can see how things are progressing. Nothing motivates like looking at the scoreboard!

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Jaime Ervin
is a mom, attorney, and certified teacher living and blogging in Western New York. Raising an eight-year-old fairy princess and a sassy teenager who can’t wait to be 30 is her life’s greatest challenge and joy. You can find her blogging at www.parentpalace.com.

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How to Help Your Teen Choose a Credit Card

Many parents shy away from giving teens credit cards, fearing they’ll rack up debt or misuse the card. But building credit history and healthy credit habits are some of the most important life-long financial skills you can teach your teen.

The first step is helping them find the right one. With thousands of credit cards to choose from, how do you know which is best for your teen? There are different ways to approach it, but consider how old your teen is and their financial standing.

Young Teens (Ages 13 to 17)

Don’t worry: Teens this young are not legally allowed to have their own credit accounts. However, this isn’t a reason to keep their credit histories blank.

Young teens can be added as either an authorized user on your credit card account, or parents can open a new credit account of which both you and your teen are joint account holders.

Both options are a great start for building your teen’s healthy credit history. You will be able to establish a credit file for your teen while maintaining control of their credit habits.

Keep in mind that any debt on the card or lazy credit habits like late payments will transfer to your teen as well, lowering their credit score. Also remember that you’re ultimately responsible for any charges your teen accrues.

Older Teens (18 and Older)

Once teens reach adulthood, there are lots of credit card options. While parents can keep their teen as an authorized user or joint account holder on one of their cards, if you feel they’ve showed they can be mature and responsible with a credit card, consider having them open their own credit card in their name. (The regulations for this vary from state to state; in some states, cardholders under the age of 21 require a parent or guardian to cosign.)

If your teen opens a card without a cosigner, urge them to opt for a card with a lower credit limit, while keeping in mind your teen’s financial situation. If your teen has multiple part-time jobs and a healthy income, then their credit limit can be a bit higher than one given to unemployed teenagers.

The next major decision will be deciding on the right card for your teen and whether they will choose a student card or a secured card.

Student cards and secured cards are the two main types of credit accounts offered to teens. A secured card sets a credit limit based on the size of a security deposit placed on the account; an unsecured student card doesn’t require a cash deposit, and is tailored to students’ needs, like lower credit limits and offer incentives aimed toward a student lifestyle, such as cash back on groceries or textbooks.

Teach your teen that card rewards are not a worthwhile reason to generate a high balance. Many teens, especially young college students, fall into the trap of spending more just to receive more airline miles or cash back.

While both student cards and secured cards are great ways for your teen to practice responsible credit and build credit, credit bureaus generally don’t see secured credit cards as favorably as unsecured student cards.

Whichever credit arrangement you decide works best, make sure your teen knows the ground rules of a credit card and the risks and benefits associated with using them.