Building Credit

What is Credit?
• The dictionary defines credit as “confidence in a
purchaser’s ability and intention to pay, displayed by
entrusting the buyer with goods or services without
immediate payment.” (Dictionary.com) But what does
that really mean?
• In simple words, credit is a measure of how likely you are
to pay something back. When you buy a car without
paying for all of it at once, your credit tells the bank if
you can be trusted with a loan.

• Good Credit = Easy to Trust

• Bad Credit = Hard to Trust
 Credit

• Just about every purchase you will make as an

adult will involve your credit in some way. You
need credit to buy a car, rent a house, get a
loan, apply for a credit card, and do anything
along those lines. The sooner you start
building your credit, the better off you will be.
 How does a sales person knows if they can trust
someone by giving them the good they want to
purchase on credit?

• The only way to really know if this is a good

idea is to look at the person’s past. Has he/she
made payments on anything else before? Does
he/she owe money to a lot of other people?
These answers are all part of his/her credit.
• By looking at the buyer’s credit, you can see if
he/she is “worth” giving them the good they
want to buy.
 Credit Scores
• Once you start building it, your credit will be assigned a
number, known as your credit score. Credit scores range
from 350 to 850, with 850 being the best score you can
get.

• Your credit score will not start out at 350. It probably

will start in the 500’s or 600’s, depending on what you
do to build it. Most people fall into the “fair” or “good”
credit ranges. The national average credit score is 705.
• Every time you make a payment for a loan,
credit card, or a bill (in some cases), you get a
positive mark on your credit. This mark won’t
have a specific value like a grade in class
would, but it will work with all the other
marks to determine how high your score will
go. Long, steady payment histories improve
credit, and missed payments make it worse.
You have to keep track of your score to make
sure it stays high.
 How can I See my Credit Report?
• You can request a free copy of your credit report from
each of three major credit reporting agencies – Equifax,
Experian, and TransUnion – once each year at
AnnualCreditReport.com or call toll-free 1-877-322-8228.
You’re also entitled to see your credit report within 60
days of being denied credit, or if you are on welfare,
unemployed, or your report is inaccurate.
• It’s smart to request a credit report from each of the three
credit reporting agencies and to review them carefully, as
each one may contain inconsistent information or
inaccuracies. If you spot an error, request a dispute form
from the agency within 30 days of receiving your report.
 Building Good Credit

• Building good credit is an important part of being an

adult. There are several ways to build good credit,
and one is no better than the others. You could…
• – Make payments on a credit card.
• – Make payments on a small loan.
• – Make payments on a piece of furniture.
• – Make payments on a house (not in rent).
 It Takes Credit to Build Credit
• In order to build credit, you have to find people that will
trust you with a small amount of money. If you pay that
back on time, you will get a good mark and a higher
score.

• You need credit to make credit. Sadly, most places that

will help you build your credit want to see examples of
your credit from the past. If you have no score to show
them, you might not get the opportunity you need.
• When you first try to build your credit score, you will need
to get small credit cards and loans from companies that
don’t look at past credit. These credit cards and loans will
not be worth much, but they will give you a chance to get
started. You may also get credit by paying on your
household bills, like your cable, internet, electricity, and
water. These bills will help slowly improve your credit score.
• You can also work with someone called a cosigner if you
apply for a loan. This is a person that already has credit and
is willing to put his or her name on a loan for you. By
cosigning with you, this person is telling the bank that he or
she will take over your payments if you stop making them.
Your cosigner could be a parent, a grandparent, a friend, or
anyone that you know with a steady income and a good
credit score.
 How does a person get bad credit?
• Bad credit comes from not making payments on
time. It has nothing to do with how much money
you owe in loans and credit cards. You can be in a
lot of debt and still have a good credit score if
you are making all of your payments on time. If
you get a loan or a credit card that you don’t pay
for, you’re going to get a bad credit score.
Sometimes you can’t avoid this, like if you get
medical bills in a car accident. Other times, you
have to find a way to make your payments on
time if you want to keep your credit score high.
 Factors that lead to bad credit include:

• – Missed payments
• – Payments that are too low
• – Outstanding debts (Those that you have not paid
for a long time)
• – Excessive credit inquiries (Too many people looking
at your credit)
• – Car repossessions (You lost your car because you
couldn’t pay for it)
• – Home foreclosures (You lost your house because
you couldn’t pay for it)
 Bad Credit
• When you first become an adult, you will have no
credit at all. Nevertheless, some companies will be
willing to work with you to help you build your credit. If
you miss payments on a regular basis, your credit score
will be low. Then those same companies probably will
not want to work with you.

• When used correctly, credit cards can do wonders for

credit scores. Every positive payment you make on
your credit card will be a good mark on your credit
history. Make these payments consistently, and future
lenders will see that you can be trusted with a line of
credit or a loan.
 Bad Credit

• However, failure to make your credit card payments

could lead to disasters on your credit score. Most
credit card companies are more likely to report bad
credit than they are to report good credit. In other
words, it only takes one mistake to make your credit
score drop significantly, even if you have a great
history before that.
 Building Credit

• You won’t be able to build your credit until you turn

18. With this in mind, there are things you can do
now to start developing good habits for the future. If
you learn how to manage your money and your
accounts correctly, you won’t have to worry about
credit card debt in the future.
 Ideas to Keep in Mind

• – Practice with a prepaid card or debit card. You can

buy one of these if you’re 13 or older, as long as you
have your parent’s permission. With a prepaid card,
you put a certain amount of money on the card, and
that acts as your spending limit. If you have a bank
account, you could also ask your parents to get you a
debit card to use. Then you can monitor your
spending on the card, pretending there are fees
associated with it. Take this seriously, and you’ll feel
like you own a real credit card!
 Ideas to Keep in Mind
• – Learn about different forms of credit and the fees
associated with them. Think about this as research for
what’s to come. Check out some of the different loans and
credit cards you might get when you’re an adult. You’ll soon
know what to look for and what to avoid, which will
hopefully help you make better decisions in the future.
• – Help your parents monitor their credit. If your parents
will allow you to see their credit reports and scores, take up
the opportunity! This may show you more than you need to
know about their finances, but at least you’ll get to see what
credit is really like. If you can’t look at your parents’ credit,
ask them questions about how their credit scores have
changed over the years. Find out why they changed the way
they did, and make note of any mistakes to watch out for.
 Ideas to Keep in Mind
• – Live on a budget. If you’re one of those lucky kids that
gets anything he or she wants from his or her parents,
stop taking advantage of that. Instead, take your
allowance and put it away for safe keeping. Put yourself
on a budget and actually stick to it.

• You just have to learn how to spend money responsibly.

If you can do that, you will naturally build good credit
when you’re 18.