For most adults who are out of school, there's only one "grade" left that really matters in your life: Your credit score. A good one can save you hundreds of thousands of dollars over the course of your lifetime, and a poor one prevent you from living the life you want to.
In this clip from Motley Fool Answers, Alison Southwick, Robert Brokamp, and Fool alumna Dayana Yochim explain why responsible use of a credit card or two is a smarter move than avoiding short-term debt altogether -- and talk about what "responsible use" means.
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This podcast was recorded on July 12, 2016.
Alison Southwick: The next question comes to us from Debt Freeman. Not the real name, I assume.
I'm 24, just finished school, and have never owned a credit card. Well, there's an Old Navy credit card I got to get 30% off some awesome summer clothes [that] I never used again. My friends tell me that I need to start building credit, and I tell them that I don't like to spend money I don't have. I have student loans. My parents put my name on one of their cards a while back, piggybacking off of their credit. Are these good-enough ways for me to build credit, or do I need to open a credit card and enter the big, scary world of credit card debt from which few ever return? Sincerely, Debt Freeman.
Dayana Yochim: To build credit, you don't have to spend money that you don't have. Part of building credit -- and part of managing credit successfully -- is not spending money you don't have. It's paying your bill on time all the time. So I would recommend to Mr. Debt Freeman to yes, get a credit card in your own name, because you need to start establishing credit just for yourself. Use the card occasionally or else it goes dormant. You want the credit card company to report something to the credit reporting bureaus.
Alison: Once a month?
Dayana: Yes, once a month is fine. Just put something small on it and pay your bill on time. Those two things alone are really the cornerstones of building credit. It's having it in your name and then also showing that you're a responsible user of credit. So there's no truth to the myth that you have to actually have a balance on your card and go month to month to build credit.
Alison: Just buy some stuff and pay it off. And if...
Dayana: If it's an Old Navy...
Alison: If it's Old Navy, so be it.
Robert Brokamp: I would recommend that Mr. or Mrs. Freeman also check their credit score, as it is. He or she probably does have one, because she does have the school loans. Being on someone else's credit record will also add to your score. That may be good or bad, because she's on her parent's, and who knows how her parents are doing.
Alison: He or she...
Robert: He or she. So he or she may decide that he or she doesn't want to be on her parents' record -- his parents' -- their parents' records. OK, we'll call this person Pat.
Alison: No, Debt Freeman.
Alison: Debt Freeman!
Robert: Debt, your parents may not be good with credit, so you may not want to be on their record, because what they do could affect your score.
Dayana: Or, if you're a particularly vindictive child, you could also mess up their credit, but they are responsible for the bill. Now an authorized user versus a joint account holder are different things. An authorized user is different from being a joint cardholder. [With] joint account cardholders, things are definitely reported on both of their credit files. Also, one can't close the account out totally without the other's agreement.
Out of context, this is going to sound really stupid. Likely Debt is an authorized user, and Debt's parents can kick him or her off the card at any time. So go ahead, establish credit in your own name. You don't have to build debt to do so. Good luck!