Building Credit for Beginners
by Grace Bithell, MSW, and Rachel Bithell
As a case manager for a transitional housing program, Grace Bithell worked with a young man who entered foster care for the fourth time as an older teen. He reached his 18th birthday without permanent caregivers, but was anxious to be free from the oversight of caseworkers and courts. However, with no credit history, security deposit or co-signer, no one would rent to him. He ended up homeless and entered the housing program.
Luckily, the program provided this young man with near daily support that assisted him with resume writing, interviewing skills, budgeting, managing bank accounts, filing taxes and building credit history. Within a month, he had a full-time job and began establishing credit by making smart choices with a credit card. After several more months, his savings and credit history allowed him to rent an apartment with a friend.
Young people in out-of-home care often have many urgent needs. Building good credit history can seem like a low priority until no credit or bad credit prevents them from renting an apartment or buying a house or car. Credit is an agreement between a borrower and a lender, where the lender provides money (or other collateral) for something the borrower wishes to purchase but doesn’t have the funds to do so. The money (or other collateral) must be repaid within a specified time, and may incur interest. Interest is what the lender charges the borrower for the convenience of using the money or other collateral. Credit cards, mortgages and student and car loans are all examples. Credit history is a record of how a consumer has used credit in the past, for example, if they made payments on time and kept credit card balances low.
Lenders use credit history to make decisions about whether to give consumers credit and at what interest rate. Landlords, as well as most insurance, telecom and utility companies, also use credit histories when deciding with whom to do business and on what terms. The following suggestions can help youth, caregivers and case professionals build a positive credit history that will enable independent living.
Learn about banking. Most banks and credit unions allow caregivers to open joint accounts with young people. Caregivers could deposit allowance monies into a bank account tied to a debit card. To protect their own credit and prevent surprise fees, caregivers can choose a lower-risk account that doesn’t allow overdrafts or the use of paper checks. For information about these accounts see bit.ly/low-risk-acct.
Caregivers should help young people plan a budget for personal needs, like clothing or bus fare, or personal wants, like concert tickets or a mani/pedi. Young people should also be introduced to saving for larger, long-term goals like college tuition or bigger purchases such as a new Apple Watch or iPad. Young people should learn to use both in-person and online banking to make deposits, track their money, and pay bills.
Young adults in foster care can still learn the basics of budgeting and revolving credit accounts, like credit cards, and fixed term loans, like car and student loans. Adults can help teens understand that saving money and building credit will enable them to get their own apartment, car loan, cell phone and/or insurance. Many high schools and community colleges offer financial literacy classes. The Chafee Foster Care Independence Program in your state may also offer free financial management programs. For a directory of program coordinators by state see bit.ly/state-etv.
Understand credit reports and scores. The three major credit bureaus in the U.S. are Experian, Equifax and Transunion. Each receives (primarily) monthly reports from lenders about consumer credit account balances and payments. The credit bureaus maintain a record of this information, called a credit report, for each consumer who uses credit. The report includes personal identifying information like your name, Social Security number, address, date of birth and employer. It also shows information about your credit accounts (credit cards, auto loans, mortgages, etc.) including the date the account was opened, the credit limit or loan amount, the current account balance, and any missed or late payments. Credit reports also list companies that have requested a copy of your report, which is called a credit check or inquiry, in the previous two years. Bankruptcies, judgments from lawsuits, foreclosures and debts sent to a collection agency are also reported. Generally, negative information, like late payments or collections, stays on the report for seven years, although in some cases the information may be removed if the issue is resolved. Consumers must usually provide their personal information and agree to a credit check and the reporting of their future account activity as a condition of receiving credit.
Credit scores are calculated based on the information in a credit report. The most commonly used credit scores are FICO 8 scores which range from 300 to 850. However, lenders and other industries may use different types of credit scores. The higher your FICO score, the better, and you’ll get better interest rates on big ticket items like a house or a car.
Scores generally use five kinds of information from your credit report: payment history, amounts owed, length of credit history, new credit accounts and inquiries, and the mix of a variety of accounts. Payment history and amounts owed are weighted more heavily than the other factors in FICO 8 scores. A history of late or missed payments or keeping a high balance relative to the amount of credit available will lower scores.
For more information on credit reports and scores see bit.ly/report-scores and bit.ly/credit-edu.
Check your credit report for errors. By law, consumers are entitled to one free copy of their credit report annually from each of the three major credit bureaus. For people 18 and older, the Consumer Financial Protection Bureau (CFPB) recommends requesting these from AnnualCreditReport.com or by calling (877) 322-8228. Federal law requires foster care agencies to obtain credit reports annually for youth, age 16 and older, and help them correct any errors contained in the report. Youth 18 and older who are in foster care may opt out of this mandate or obtain their credit report on their own, but agencies are still obligated to help them remedy errors. For more information about obtaining reports for kids under 18 see bit.ly/report-minors.
Your free credit report will not include any credit scores. The credit bureaus charge a fee, currently about $20, to provide a credit score, usually a FICO 8 score. Many credit cards will report a credit score from at least one of the bureaus as part of your monthly statement. Be wary of companies that offer free credit reports or scores if you buy other services or sign up for trial subscriptions that you must then cancel.
Check your report carefully to be sure all information is correct. If you find errors, follow the bureau’s instructions for disputing them. Generally, you must contact in writing both the credit bureau(s) and the bank or other entity that provided the information, called the furnisher. If bureaus or furnishers are not responsive, you may file a complaint with the Consumer Financial Protection Bureau (www.consumerfinance.gov). For a description of the most common types of errors, contact information for credit bureaus, sample letters of dispute, and instructions on filing complaints see bit.ly/credit-error and bit.ly/dispute-error.
Some errors may be caused by identity theft — illegally using someone else’s personal information to open credit accounts, access bank accounts, file fraudulent tax returns, or obtain services such as health care. Youth in foster care are at a higher risk of identity theft because of the number of people with access to their private information. If you suspect identity theft visit IdentityTheft.gov and to read more, see page 20.
Build good credit with a credit card or credit building debit card. The fastest way to build credit is to use a credit card responsibly. That means keeping low balances and making all payments on time. For a young adult age 18 or older with reasonable money management skills, a student credit card can be a good option. These cards have low credit limits, typically $500-$2,000, and don’t usually require a co-signer. Setting up automatic payments from a bank account can help avoid late payments.
Youth impacted by trauma may have difficulty with long-term planning or impulse control which can make even a student credit card a risky option. Luckily, alternatives are available. A caregiver could add a young person as an authorized user on one of their cards, but not give them a card of their own or access to the account. Most card issuers allow those younger than 18 to be authorized users. Even if the young person never makes a purchase, their credit history will benefit as long as the primary cardholder manages the account responsibly. Authorized users can be removed from an account at any time. This option is a low-risk opportunity for supportive adults to help youth who may otherwise struggle to build credit history.
Young adults who are at least 18 may also open a secured credit card account, which requires the cardholder to make an up-front deposit. The deposit, usually $200-$2,000, is held by the card issuer and the card’s credit limit is equal to the deposit. Applicants should have the deposit saved before applying for the card. As long as the bills are paid on time, the account holder will build credit and receive their deposit back when they close the account or upgrade to a traditional credit card. Late payments will likely trigger fees and interest rate hikes. Past due accounts may also be closed and the delinquent amount taken from the deposit. Late payments on a secured card will also lower credit scores. However, secured cards are still less risky than traditional or student cards with outstanding balances that could be sent to a collection agency.
Another option is a card that works like a debit card, but builds credit. First introduced in 2020, these cards won’t allow users to spend more than the funds in the account linked to the card. Purchases are paid off automatically so payments can’t be late. The payments are reported to major credit bureaus each month. Currently these cards are only offered by a few companies, known as financial services companies, including Extra, Sequin, Zoro and Chime. These companies are not banks and not insured by the Federal Deposit Insurance Corporation. They partner with FDIC-insured banks to provide their products. The best way to use a credit-building debit card is to make small monthly deposits, just enough to cover a couple of purchases such as gas or groceries. Rely on traditional banks for other needs. They give consumers more recourse in disputes.
With all credit cards and credit building debit cards, carefully compare the terms, interest rates, fees and reward programs offered by different lenders. For most credit newbies, low or no fees and interest should be a higher priority than rewards, mileage points or higher credit limits. Also check reliable online resources, such as Forbes, for reviews.
Enroll in Experian Boost and/or eCredable Lift. Since 2020, Experian has offered Boost, a free program that increases credit scores by including on-time payments for many utility, telecom and streaming service bills. Late payments won’t reduce your credit score. As a bonus, Boost also allows consumers to see their FICO score from Experian. See bit.ly/boost-experian.
Transunion offers eCredable Lift (https://ecredable.com), which also raises credit scores by counting on-time payments for utility, cell phone and internet services. Late payments will count against you, and Transunion charges a fee for the service, currently $24.95 annually. For both services, keep in mind that only reports and scores from the bureau that offers the service will be impacted, and some kinds of credit scores do not utilize this information.
Three other options for building credit may be useful in some circumstances but have drawbacks. Credit building loans usually require a commitment of a year or more and interest and fees are high. Rent reporting can raise some credit scores for people with a history of on-time rent payments. However, setting up the service can be difficult and costly, and it doesn’t impact FICO 8 scores. UltraFICO provides an alternative credit score that is boosted by good banking habits. The service is still in a pilot phase so few lenders currently consider UltraFICO scores.
With the right support and tools, young people can build a credit history that will open doors to opportunities instead of locking them out. •
Grace Bithell is a clinical social worker based in Utah. Her background includes working in a transitional housing program for individuals experiencing homelessness, helping parents navigate high conflict divorce, and providing community mental health services. She also taught financial literacy, including one-on-one credit repair and budgeting. In her current practice, Grace specializes in women’s issues and the treatment of trauma disorders. During her adolescence, she was a permanent child in a fostering family.
Rachel Bithell is the mother of Grace and five other children, some of whom were adopted from foster care. Her family was a licensed resource family in Colorado for six years. During that time, Rachel taught pre-service training and trauma-informed parenting classes for her tri-county agency. Find more of her writing at rachelbithell.com.