Building credit as a 23 year old
Hi Terry,
First off, I love the show on WGN! Thank you for your consistent wisdom. My question to you is about building my credit score as a 23 year old.
Here is my situation: I have no massive debts obligations of any kind (student loans, mortgage, etc), I have two credit cards that I pay off in full every month (monthly spend between both is around ~$1,500 on average), I live at home (no rent obligation), and have a stable job in finance.
I have been considering purchasing a new car at 0% financing for 66 months, and I am asking for your insight on how this would affect my credit. My oldest credit card and longest form of credit is about a year and a half old with the second credit card is about 3 months old. If I purchase this car and agree to these financing terms, my name and my Dad’s name would be on the title/loan. The kicker is, I am looking to purchase a condo on my own within the next year.
My questions to you: how would this auto loan effect my creditworthiness in the near term (12-18 months), and my ability to procure a reasonable loan for my first property? I don’t NEED the car right now, but my current one has been having routine maintenance problems, and I’m looking to avoid a costly catastrophe. Does my dad’s name on the loan effect my score? Would it be better for credit building purposes to take on the loan myself? Thank you for your help, I’m looking for any insight you have here!
Terry Says
Well, good for you for knowing about this issue and working to make sure you solve it correctly. You’re doing everything right to build your credit score — but the biggest factor that you really can’t impact is “time”! It just takes time to build a credit history –in addition to always paying on time!
Re the impact of the car purchase: A lot depends on the ratio of your debt obligations to your income when it comes to your credit score. Have you checked your credit score at either your bank or online at CreditKarma.com?
Let’s talk about the car first. You know you’re paying a lot more for the car by financing it right? The cost of money is built into the price of the car. Go to www.KBB.com — Kelly Blue Book to find out what the cash cost of this car should be. Then go negotiate the cash price of the car at the dealer using this info. As if you had the cash in your bank account!
Then you can either use their credit facility for a lease or financing –and see the difference in what the monthly payments (and end of lease buyout price) would add up to– And compare with cash now!! That will give you the true cost of financing the car at ZERO percent. It’s a come-on — nothing is free!
So, let’s say you do buy and finance the car. That monthly payment will become part of your “use of credit”. Paying on time and in full every month will build your credit score. So yes, you should do this ONLY in your name.
You don’t have to be in a rush to buy the condo –though that’s a nice goal. A lot can change in a few years — maybe you’ll even be thinking of starting a family! Or maybe your job will take you to another city or state.
Maybe a better goal is to open a Roth IRA and contribute regularly. That could give you options down the road.
Just remember the first rule of savings: If you don’t see it, you won’t spend it! So make any savings plan, either inside an IRA or in a MM fund, an automatic monthly contribution.
