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Just Starting Out (advice wanted)

Krissi
Contributor

Just Starting Out (advice wanted)

Hey everyone!

So I turned 18 a couple weeks ago. I applied for the Discover secured card and it should be arriving next week. I've setup Credit Karma and everything because I'm super obsessive over stuff like this Smiley Happy

I know the basics, like keeping Credit Utilization under 30% and paying my balance in full each month. I'm also aware it's a long journey and for any bank to even count a credit score, you need a minimum of 6 months of history (and for them to care, a lot longer).

I'm considering buying a (realistic) second car later this year, and I definitely want to work towards buying a home in the next couple years. My biggest hurdle is that I'm self-employed, but I have had a steady income stream since 2015 so I know tax forms can help me establish my worthiness.

What advice would you guys have for building credit history? What looks best: having only one card, or having two? Would financing a car help or hurt me (it'd be a 36-month loan)?

Thanks in advance!
Sydney

Message 1 of 9
8 REPLIES 8
CreditGuyInDixie
Super Contributor

Re: Just Starting Out (advice wanted)

Next steps:

 

(1)  Use your Discover card at least a little bit each month.  Make sure the balance is reporting with at least $5 but also with < 9% of its total credit limit.  After the statement arrives pay the amount on the statement in full.

 

After you have been doing this for six months, you should have a true FICO score.  At that point, move on to step 2.

 

(2)  Open a $500 Share Secure loan with Alliant and pay off most but not all of the balance.  The details of what to do and why it works are here.  You only need to read the first three posts:

 

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

 

The SS loan will give you a 30 point FICO score boost (roughly).  The process will take a couple months.  Once you have done that, move to step 3.

 

(3)  Open two more credit cards.  You can use all three cards, but make sure that two of the three always report $0.  That means paying them to $0 before the statement prints.  Always make sure one of the three reports a positive balance.  Keep your total utilization very low.  Three cards are better than two, from a scoring persective, and two are better than one.  More than three will not help, at least early on.

 

Then allow your accounts to age.

 

Financing a car is not necessary to have a great score.  The SS loan will mimic the installment loan history and will do it far more cheaply than a car.  Of course, if you later need a car and financing makes the most financial sense, then of course do that. 

Message 2 of 9
Krissi
Contributor

Re: Just Starting Out (advice wanted)

Thanks for the advice!

I looked at the Share Secure Loan, is that anything like the Credit Builder Loan that selflender.com offers (you pay $48 a month into a savings account, after 12 months, $550 is released to you).

Sydney

Message 3 of 9
SouthJamaica
Super Contributor

Re: Just Starting Out (advice wanted)


@tothephonebooth wrote:
Hey everyone!

So I turned 18 a couple weeks ago. I applied for the Discover secured card and it should be arriving next week. I've setup Credit Karma and everything because I'm super obsessive over stuff like this Smiley Happy

I know the basics, like keeping Credit Utilization under 30% and paying my balance in full each month. I'm also aware it's a long journey and for any bank to even count a credit score, you need a minimum of 6 months of history (and for them to care, a lot longer).

I'm considering buying a (realistic) second car later this year, and I definitely want to work towards buying a home in the next couple years. My biggest hurdle is that I'm self-employed, but I have had a steady income stream since 2015 so I know tax forms can help me establish my worthiness.

What advice would you guys have for building credit history? What looks best: having only one card, or having two? Would financing a car help or hurt me (it'd be a 36-month loan)?

Thanks in advance!
Sydney

1. Since you're self employed, it's important to (a) report all your income, (b) keep careful bookkeeping records on a daily basis, (c) keep your business and personal finances completely separate, (d) stay up to date on paying your taxes, including estimated taxes if applicable. If you have a corporation or LLC, you should have a payroll service, so that any money paid to you personally gets paid with a W2 and full withholding, and then you have nothing to worry about at the end of the year,

 

2. 1 card is enough for now. Be sure to pay it down constantly, even before statement date. Later on, when you have multiple cards, make sure most report a zero balance.

 

3. A car loan will in the long run be helpful to your credit, but in the short term may well cause a score drop. You'll get the points back, and even gain some, as you pay it down. Once the loan is paid to zero, scores usually dip, so be forewarned about that. But I wouldn't plan my finances over that. It's better in life to have a paid-off car loan, and the clean title that comes with that.


Total revolving limits 677500 (584500 reporting) FICO 8: EQ 745 TU 750 EX 719

Message 4 of 9
CreditGuyInDixie
Super Contributor

Re: Just Starting Out (advice wanted)

Hi Sydney.  The CB loan you describe is similar but not nearly as good.  First off, it only stays open for 12 months.  The Alliant loan will stay open for 60 months.  Second, the way you describ the CB loan, you are not able to pay off most of it up front. 

 

Thus (point #2) you do not get very much benefit from it at first and (point #1) when you finally do get some benefit (at month 11) the loan closes the next month and all the benefit goes away.  Remember that the goal is to have a loan that (a) lasts a long time and (b) throughout that time has been almost entirely paid off.

 

If you read the second post in that thread (the Theory Behind The Technique) all that is explained.

Message 5 of 9
Chris679
Established Contributor

Re: Just Starting Out (advice wanted)

OP keep in mind that at your age with no negatives your credit score should be ok to begin with and you should not have to take out a loan simply to inflate your score. The car loan would accomplish the same thing but could take a little more time. You have something to show for the loan, it does not tie up your money in a savings account for years and you can still pay it down early. A SSL can be a way to jump start your credit if you are rebuilding and struggle to get approvals but with a clean file I don't think it is needed.
Message 6 of 9
CreditGuyInDixie
Super Contributor

Re: Just Starting Out (advice wanted)


@Chris679 wrote:
OP keep in mind that at your age with no negatives your credit score should be ok to begin with and you should not have to take out a loan simply to inflate your score. The car loan would accomplish the same thing but could take a little more time. You have something to show for the loan, it does not tie up your money in a savings account for years and you can still pay it down early. A SSL can be a way to jump start your credit if you are rebuilding and struggle to get approvals but with a clean file I don't think it is needed.

Hi Chris.  Remember that our OP, being new to credit, may not have a score in eight months that is high enough to secure him the best interest rate on a car loan.  But the extra 30 points he'd get from the SS loan could easily push over the line so that he was eligible for best rate.

 

Also, the $500 Alliant SS loan would not tie up his money in a savings account for years.  It would do that for two months, however, so if he deosn't have $500 he can tie up for that length of time he should avoid that strategy.

 

Finally, not all auto loans can be paid down early and still kept open.  It depends on the lender.  And even if the lender permits that, most 18 years olds don't have the funds to pay off most of a car loan within the first few months.

Message 7 of 9
Krissi
Contributor

Re: Just Starting Out (advice wanted)

Thanks for explaining it, I read a bit more on the thread about getting one from Alliant.

Would having an open loan prevent me from getting another (or lower my chances)? Say in a year or two if I try to finance a car or get a bank loan, will they say no/give higher interest if I have an Alliant loan already open?

Thanks again,
Sydney

Message 8 of 9
CreditGuyInDixie
Super Contributor

Re: Just Starting Out (advice wanted)

Your chances will be better, not worse.

Message 9 of 9
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