Building credit responsibly

How to build credit now without ruining your future

The world keeps telling you you need to build credit. But the truth is, you don’t have to work too hard at it. Here’s what you can and should do—and what you shouldn’t.

Podcast transcript

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PETE: You’re listening to how not to move back in with your parents here on the IU MoneySmarts Radio Network. I’m your host, Pete the Planner, hello. Alex is my cohost and he is here, hello.

ALEX: Hi there, I’m here.

PETE: You’re always here. You’re like stuff that’s always there. Back to you, buddy.

ALEX: I was about to say like a dog, but then I’m calling myself a dog, and that isn’t gonna work.

PETE: Joining us in the studio today is Phil Schumann with IU Money Works. Hello.

PHIL: Howdy!

PETE: Money Works, what am I about? MoneySmarts.

PHIL: I wasn’t gonna correct you on that.

PETE: Feel free, you’re my boss. So that got weird. [LAUGH] Phil, this week, I wanna look at budgeting again. The screw up on the mic here a little bit, I like to hear you. I mean, you look very relaxed.

PHIL: I am relaxed.

PETE: Sound is important though. I think, let’s talk a little bit, not like about budgeting, but about how credit cards fit in to budgeting. Alex, we’ll start with you. Again, junior, Indiana University. Why have you or haven’t you made a credit card part of your college experience?

ALEX: No credit cards right now.

PETE: Okay.

ALEX: Honestly, I don’t feel like I need to get in that yet.

PETE: Okay.

ALEX: I don’t want to get in that yet, and put more pressure on myself that I don’t feel like I need to at this time. Sure, and I’m just focused on the student loans. Afterwards, that’s really the only thing, credit wise, that I might have. Honestly, I haven’t had an interest in getting one.

PETE: And friends of yours, buddies you see, are you starting to see them dip into that world, or what?

ALEX: A couple of them, yes. I have seen one particular instance. I have a friend who, this is, I think, a little extreme, but he bought a new car and is making payments on a credit card he brought out to build credit. I think that’s a little intense.

PETE: Wait, hold on, my head’s spinning. He bought a car on a credit card?

ALEX: So, he got a credit card and there is a new car that he bought, his parents helped him out.

PETE: Uh-huh.

ALEX: And he is making the payments for that car, or at least part of the payments, on his credit card that he got to help build credit. So that’s a little intense.

PETE: That’s crazy. By the way if you are listening at home, or on a bus, I don’t care where you listen. That’s crazy, don’t do that.

ALEX: All right.

PETE: That’s nuts, but anyway yes. Yeah, so that’s about it. Send him this podcast, and his parents.

ALEX: All right.

PETE: Judge him.

ALEX: Will do, but the other ones are just building credit.

PETE: Sure.

ALEX: And making payments, everyday expenses, things like that.

PETE: Phil, I gotta think, I mean you direct a financial literacy programme, there has got to be a lot of pressure to build credit, I mean do you see that? I mean they’ll be, I want good credit, I gotta establish credit. You think students make mistakes when it revolves around this?

PHIL: Absolutely. Every student that I’ve talked with that’s talked about credit are doing it from the standpoint of, I need to build credit. It’s the most important thing to have after graduation. They know that they wanna build credit, but none of them know how to do it responsibly.

PETE: I was speaking in Chicago in February, and a guy came up to me after I spoke, and he said, Pete. I mean great talk man, I was like, yeah, I know. And he said I make $120,000 a year. I was like, all right man, thanks for stopping by. This is kinda awkward.

PHIL: Congratulations.

PETE: Yeah great job buddy, and he’s like no no no no, I have a 785 point credit score. And by the way, just so you know, listening. That’s really good, like 850 is perfect, 785 is really good. And I was like, all right man cool, thanks for stopping by, this is really awkward, I don’t know what to do now. And then he said, the reason I am telling you is because I have $90,000 in credit card debt, and I have $4000 a month in minimum payments I have to make so I don’t go into collections. And he goes I’m freaking out, and he said I know this sounds terribly stupid. But all I ever heard is that I need to build my credit score, and once I have a good credit score, as long as I will be able to maintain it, That means I’m financially healthy. And so I just figured that they would turn me down for debt that I shouldn’t take out, or that my score would go down if I was doing things that were stupid. And now I find myself $90,000 in credit card debt with $4,000 a month in obligations. So Phil, to your point, that pressure extends into the work life of, I need a great credit score. But I’m here to tell you that you need to establish good credit, but your credit score’s less important than you really think. It’s about good credit habits and good decisions. And you cannot cater and to your score itself.

PHIL: Absolutely.

PETE: So, Alex when you do go to build credit, which is important. It’s not about repairing credit, because frankly you just don’t have any credit. Your student loan payments are good to help with that and that’s great. You can’t get in a hurry. I got an email, a tweet. If you actually, from a guy that wanted to know, if he could pay cash for his semester of law school at IU. And he wanted to know if he should do that, or take out a student loan, and then quickly pay off the student loan in order to establish credit. Well the reality is, number one you should never do anything out of your way that seems like a bad idea to pay off or to establish credit. And I think we all would agree, if you can pay cash for it why take out a student loan simply to establish credit? That’s a terrible idea.

PHIL: Definitely.

PETE: But the number two thing there is. It doesn’t make any sense at all to get any interest, to pay any interest for the point of establishing credit because you’re trying to pay off a student loan over a two-month period. So the best way to establish credit, as you try to fit it into your budget, if especially when you’re out of school, is to get a One credit card to establish credit. Put one category of spending on it, okay? Not fuel and groceries and hair care. Just hair care, or just fuel, or just groceries. Cuz the second you put more than one category on there, then two is a good idea and three is a good idea, and then hey. Now we just write a check at the end of every month and pay it off. Which studies have shown that people that put all their expenses on their credit card, pay off at the end of every month, although that seems responsible. Studies show that people spend 20% more than people that simply use their debit card, their checking account for those transactions. So get this credit card, I recommend a website like cardhub.com. And it’s important you know they are not compensating me for telling you to go there, which would be nice if they at least sent a brother some nuts or something I don’t know. But Cardhub, [UNKNOWN] pistachios Alex, don’t give me looks, they’re delicious, shelled or otherwise.

ALEX: Yeah, I’m not disagreeing with you.

PHIL: Or in ice cream form.

PETE: You like pistachio ice cream?

PHIL: Love it.

PETE: Here’s the thing. I think it’s kind of an old guy ice cream.

PHIL: And?

PETE: It is. It’s like black walnut. Do you like black walnut ice cream, Alex?

ALEX: I’ve never heard of black walnut ice cream. Now here’s the thing, old people love black walnut ice cream. Do you like it?

PHIL: I’ve actually never had it.

PETE: It’s, it’s not, Jack the Sheriff here at, he loves black walnut ice cream. And I’m not gonna call Jack an old guy. But he got my attention, cuz his silver hair caught my eye. But he loved black walnut ice cream. Anyway, Cardhub’s not sending the black walnut ice cream. Go to cardhub.com and look for a secured credit card. That’s what you submit to them, $500, $300 and then you get like a prepaid card, and then the payments you make on that, on your credit, report on the credit agencies and it builds your credit. That’s a good thing to do. Again, you’re gonna have a $300 or a $500 limit to start, but you’re just trying to practice. You don’t need to go into other couple thousand dollar limit. You’re gonna get yourself in trouble. Phil, I think another mistake people make when it relates to budgeting and credit, especially in college, is to think that, well, I’m gonna rack up just a little bit of credit card debt, because when I get my first job, I’m gonna pay this stuff off. It doesn’t really work that way.

PHIL: Not at all.

PETE: And why do you think that is?

PHIL: I think the more you become accustomed to that mindset, the deeper the trouble you’re gonna be in. If you’re thinking to yourself, yeah I’m just gonna charge it and pay it back once I graduate, once I get my job. You’re just gonna end up racking up a bunch of debt, you’re gonna spend more than you thought you were. And then when it comes to kind of the point we were talking about, with the guy who had $120,000 salary or whatever, he was in a ton of debt despite probably his best efforts not to be. He just got accustomed to spending off that credit card and got himself into trouble.

PETE: One of the strangest phenomenons that you may recognize as you get a job and start working, is that you tend to adjust your spending up to your income, no matter what in the world your income is. I used to work with professional athletes a lot, NFL players and their first contract, they’re making a few hundred thousand dollars a year. And the second they get that second contract, which usually took them into the seven figures, their spending would immediately adjust to that. So, no matter how much you make or who you are. It’s kind of a natural phenomenon that happens. And so what happens if you say, I’m gonna just pay off my credit card debt when I start getting a real job, when I graduate from school. The reality is the rest of your spending, your expenses, the different categories and expenditures, they will adjust up too. So you’re not going to have that margin that you think you’re gonna have to pay off the debt from your college days. And it’s just an ugly start. So number one, if you’re gonna use credit cards in college. First of all, I frown upon it. But if you’re gonna do it, try to do a secured card that’ll build some credit is certainly a good way to go. So Alex, when it’s time to pull that trigger, besides calling me, I’ll hold your hand and walk you in there and do it. Make sure you do it on a secure card.

ALEX: Got it.

PETE: And bring some pistachio ice cream.

PHIL: Please do.

ALEX: So not black walnut ice cream?

PETE: I’m not that old. All right, so this has been another episode of how not to move back in with your parents who happen to enjoy black walnut ice cream, brought to you by the IU MoneySmarts Radio Network.

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