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Old 03-06-2011, 01:04 PM
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DavidBibby DavidBibby is offline
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Default Re: First credit card- good for credit rating??

Originally Posted by KatherineLee88 View Post
Yes, I agree with you on a few of those points. I have also heard that the use of plastic like a debit or credit increases a person's chance of spending more money than they needed to. This is why it's important to keep a budget in perspective when using cards. Keep all receipts, and add things up at the end of the week. I add up everything on my slips that I deemed "unnecessary" and boy, yes, I am at times a "victim" of the use of plastic. However, I have never been a victim to the extent that I couldn't pay the bill in full each month. That's where self-control comes in. Even a person with a wad of cash in their wallets can burn up unnecessary money if they lack self control. Avoiding credit because of a fear that you will fail to use it properly is irrational. People need to try - and start small - to master the use of credit.
I agree with you completely. People can misuse both cash and credit cards. I think were you and I differ is in our initial assumptions about a person's sense of responsibility and maturity.

For example... I assume that most 22 year-olds are irresponsible with money because 1) I was once irresponsible and misused both cash and credit 2) Handling money responsibly is simply not "taught" in schools and 3) Most people reach retirement age will less than a $400 net worth, which means that they misused money their entire life. People don't usually start out responsible then end up swinging the other way to financial immaturity.

Still it IS wrong of me to assume that our young friend would be irresponsible with cash and/or credit.

Would you suggest a test of responsibility..that he first open up a savings account of about $500 - $1000 cash... then get an secured credit card with the same amount?

Following that he would start charging a little bit here and there and paying the balance off in full each month to build his credit.

If he determines that he can't pay it off every month because he charged too much, or he had an emergency and used the card to pay for it. What should he do then?
Pay it off over time and then start over?

At least... if someone is irresponsible with cash..and they spend all their cash... they can't lose any more. But with credit...they stand to lose even more.

So if a person is known to be financially immature? Would you suggest they get ANY type of credit card?

How does one know when they're ready for one?

Originally Posted by KatherineLee88 View Post
Use of credit properly can be extremely beneficial. Avoiding it can be extremely detrimental.

So in terms of advice to a 22 year old with no credit history, I don't think we should be advising him to avoid credit cards (for reasons of qualifying for a good mortgage down the road). We should be advising him to get ONE credit card with a low credit limit and test the waters. When he feels comfortable with it, increase the limit or get another card and continue on the path of mastering your credit - not fearing the use of credit because thousands of people have abused it - because thousands have also NOT abused it and used it to benefit themselves and the age of 22 is a good time to start using it for his benefit.
I agree with you here as well. You also answered a couple of my above questions here as well. He should indeed test the waters.

I would contend that most people don't to that. They just dive into the deep end but applying for whatever they can get. Credit card companies frequently raise credit limits without even being asked as a way of "Rewarding" those customers that make them money.

Credit card companies target young people, especially on the college campuses. They give away a lot of free hats and t-shirts for their efforts.

You are right though... that we should advise people to make their own decisions to use or not use credit based on their own level of maturity and understanding.

Originally Posted by KatherineLee88 View Post
You said self-made millionaires at some point found themselves not needing to use credit. Great. Good for them. I understand this... because they may have used it in their earlier years to get ahead. If we were advising a 40 year old with a house already, or other assets, then cutting up credit cards for life makes sense.
It IS possible to get a mortgage without a credit history. There ARE mortgage companies that will do their own underwriting.

So someone with a decent size emergency fund, good income, and enough to put down will easily be able obtain a mortgage with the right company.

That being said... a MOST mortgage companies can't make a decision without seeing your FICO score... so I honestly can't fault someone for building their score and getting a mortgage.

Originally Posted by KatherineLee88 View Post
Once again, for a 22 year old who sounds like he doesn't have a lot of financial assets, I don't think this is good advice.
You may be right about that. On the other hand, if he's able to live with his parents awhile longer... he could have ample time to build the assets upon which he wouldn't need to use credit for these things. We just don't know enough about this particular 22 year old to say which way is the right way.

Originally Posted by KatherineLee88 View Post
I personally will use credit for life. My grandfather was a self-made millionaire through proper use of credit and investing properly, and I know another that is in his seventies STILL using credit and has net worth of 3+ million that they earned through proper credit use and investing wisely. The reasoning for him to still use credit is VERY simple and VERY smart - and obviously has worked very well for him! But that's a topic for a different thread.
Will you still need credit after you have obtained a mortgage and paid your house off? What would you need it for then? Investment Real Estate?

Originally Posted by KatherineLee88 View Post
All in all, yes... a FICO score is essentially worthless after obtaining a house and paying if off. It's the process of getting TO that point that a FICO score has a huge influence over a person. Therefore, since I'm 22 (23 tomorrow) I'm going to baby that three digit score as much as possible so 5-10 years down the road I get the most favorable mortgage terms available. Also... FICO scores can have an effect at obtaining jobs... so I wouldn't write it all off as a credit thing. Employers have used FICO scores as a base to determine eligibility for employment or who of two candidates to hire therefore credit is an important component to a person's life.
I agree with this...the FICO score, for better or worse, is your electronic reputation. Even though I don't agree with borrowing money as a form to get ahead in life, I don't want someone to damage their FICO score deliberately.

You CAN build your FICO score without credit cards... but I will concede the fact that the best and easiest way to build, raise, and maintain your score is to get a credit card, pay it off in full every month, and don't charge more than 10% of the maximum limit.

It's a RARE person who can do that. It's even more RARE for a 22 young person such as yourself to do that.

As far as using the FICO for employment.. the only time I've ever heard of it being a factor is if you're doing into the FINANCE industry. Even then.. I've never heard of anyone being turned down for a job solely on the FICO score.

Originally Posted by KatherineLee88 View Post
I agree with the net worth thing. Right now I'm primarily concentrating on "net worth" because I have been dividing my paycheck (after expenses) to a Roth IRA and my student loans. It's exciting to see my net worth change every month as I climb myself out of student loan debt and start building my nest egg. However, I am focused on net worth AND FICO score. To me, both are very important. I refuse to be afraid of using credit because others have failed to use it in the past. And I think advising a 22-year-old to not use credit is not good advice.

There have been many people on financial forums that have found themselves unable to qualify for a car loan, or RENT AN APARTMENT because they have NO credit history! Basically we're setting this guy up to not only not qualify for a good mortgage due to little to no credit history, but potentially setting him up to get turned down from renting an apartment as well. I'm not really aware of what options exist when you can't buy a home or rent an apartment. And yes, I know not all apartments need a credit history - but SOME do and I care to not limit my choice of an apartment to the roach-infested place in ghettotown because I was afraid to use credit cards.
There IS life without credit, for both the young person and the guy in his 40's

You don't have to live in the roach apartments to do it either.

I don't do car loans either.

Considering the fact that 96% of people DO NOT reach financial independence in their lifetime and that they paid over 1/3 of their lifetime income in finance charges and interest, I choose not to use credit ever again, for ANYTHING.

So if someone can get a good FICO score without paying a PENNY in interest... then THAT is exactly what they should do. But in my experience (and that of those I help everyday) the temptation to misuse credit is too great so I err on the side of caution and advise total avoidance.

While what you're doing may be easy for you... I don't think it's as easy for your average 22 year old.

Thank you for this discussion... I think a lot of people are going to benefit from hearing both sides of this debate.
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