Valerie Howard of Nashville started planning her financial life at age 14. Now, at age 22, she has two credit cards, a car, a house, a healthy 401(k), and a good credit score.
A good credit score is something you may not think about -- until you need it to get the best credit card, buy your first car, buy a house or condo or even get a job. Then it's critical.
Young people often have more disposable income than their mortgage-bound baby boomer parents, but they often lack financial independence. When you go to get that first loan, you may feel like it's a Catch-22 -- you need to have credit to get credit.
"Typically people will decide, 'Hey, I want to put a down payment on a home. I want a car loan.' That's when they realize 'I have no credit history,'" says Robert Schmansky, CFP, of Clear Financial Advisors in Bloomfield Hills, Mich.
Ideally, you would have started building credit at age 16, as did Valerie Howard, a recent college graduate who already has her dream job. But whether you're 16, 26 or even older, you can start from zero and build a good credit score. Here are five ways to run up a good credit score.
Get a secured credit card
A secured credit card is a good first choice, Schmansky says. Your money in the savings account acts to secure your payment on your credit card bill. "Usually a bank will help you set up a secured credit card," he says. "Start small with $500 or whatever you can afford," he says.
Get department store and gas credit cards
Some financial experts will advise against department store credit cards because you may be tempted to spend more and the interest rates are often higher than a regular card. But for people just starting out, store credit cards and gas credit cards are good ways to build credit, says Andrew Lerner, a venture capitalist who invests in companies that work with young people.
"Your first credit card doesn't have to be MasterCard or Visa," Lerner says. "Gas cards or department store cards are good ways to start using credit. That credit is easier to get. A lot of times the interest rates are low, or even zero. The stores offer the cards when you make a purchase. Often it's something you'd ordinarily buy anyway."
If you're worried temptation might strike at the department store, then don't get the card from a store that sells your dream, big-ticket items, Schmansky says. "Don't get it at a store where you might upgrade to a 60-inch TV when all you could afford is much less than that," he says.
Use credit when you have cash
Many people use credit cards when they don't have the money to pay right away. But when you're building credit, swipe your credit card only when you know you can pay the bill.
"Your goal is to build credit," Schmansky says. "Charge things when you know you can pay the bill and pay it off. Use credit in a positive way without incurring late charges, interest charges or being tempted to buy something you don't have the money for."
Says Lerner: "The single best way to build your credit is to take out a small amount of credit and pay it back."
Buy a car you can afford
Instead of buying your dream car, buy a car that won't break the bank. "I've always bought cars I could afford for $3,000 to $4,000," Howard says. "I buy Honda Civics that will last forever. I never buy a car where I'll have to get a long loan."
Pay all bills responsibly
Once you do get a credit card, make sure you pay the bill - and all bills - on time. This is the most important way to build a good credit score. Although paying your rent and utility bills on time probably won't help you build a credit score, paying those bills late can hurt you, Schmansky and Lerner say.
"Usually those type of things show up when you're in default and you owe," Schmansky says. Says Lerner: "If you have a history of paying your rent, it doesn't make a big difference. But if you default on your rent, it can hurt you."
6 tips from a success story
Howard learned young about the value of a dollar and the pros and cons of compounding interest. She paid interest on loans, even from Dad. "If we had to borrow money, he would loan it to us, but we had to pay interest," she says. "It started with his parents. If he borrowed money, they would give him the amortization table."
Here are six tips from Howard that will help you build a solid financial foundation -- and a good credit score.
Start working young
Howard got her first job at 14. "I worked at Chick-fil-A because that was the only place that hired 14-year-olds," Howard says. "I wanted my own cell phone so I started working there every Saturday. Then I started saving for my own car."
Look at benefits -- not just pay
"The benefits are unreal at Starbucks," she says. "I started my 401(k) as soon as I started there. Ten percent of every paycheck went to that. Another 10 percent went to Starbucks stock purchases. Starbucks also offers qualified part-timers tuition reimbursement, which helped as Howard went through college.
Start building credit early
Howard got her first credit card at 16. It was in her name, but her dad handled payments at first. "We had to give the money to him," Howard says. She now has two credit cards.
Save for the future
Although her initial goal in working was to buy a cell phone, Howard had her eye on the future fairly quickly. She bought Starbucks stock and began saving for a car and retirement. "My stocks have quadrupled in value," she says.
Howard leveraged contacts she made at Starbucks to get her dream job, working in the music industry in Nashville.
Remember small steps make a difference. This financial savvy and her savings have given Howard the freedom to take that dream job even though the pay is not high. "The salary my boss offered me was not very high, but he offered me equity in the company," she says. "Working at a job where you're miserable is the worst thing in the world. Having money saved enables you to find your passion, find out what you love."
"I see college students waiting for the big job, for the big moment to happen," Howard says. "Actually it's a lot of small decisions that add up."