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Personal Finance for Millennials: Establish a Line of Credit Now

By Motley Fool Staff - Mar 5, 2016 at 7:03AM

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How to get your first credit card (and why you want one), when to put money in a 401(k), and other advice for personal finance newbies.

Millennials are notorious for putting off paying attention to their credit scores until they get turned down for a loan of some sort.

If this sounds like you, don't worry! In this clip, Alison Southwick, Robert Brokamp, and Johnnie Weathersby go over the basics of establishing a line of credit (and why it's so important), and how to do it even if you aren't bringing in enough income to get approved for a traditional credit card.

To hear more finance tips from Johnnie, check out the other articles from this series:

Part 1: Itemize Your Lover 

Part 2: Establish a Line of Credit Now (this article)

Part 3: One Easy Way to Bring in a Little Extra Money

A transcript follows the video.

This podcast was recorded on Jan. 26, 2016. 

Alison Southwick: Step No. 3: Establish a line or two of credit, if you haven't already.

Johnnie Weathersby: Yes. This is basically encouraging people -- I hear a lot of my friends that started credit cards later in life: They've never owned any kind of property, they haven't bought a car, made any car payments on anything. So, most people, you end up graduating about now, and the only credit to your name is a student loan or something like that. You really want to look at things like building up with a credit card company over a certain amount of time, and managing that properly. Don't always max out your card, try to keep your spending within 30% to 50% of your balance, just little things like that.

Southwick: So, we actually had a letter from a listener named Chris. He's a college student looking to create some financial infrastructure in his life, but he can't get a credit card or purchase or rent a house because he makes very little income. So he wants to know, what can he do to establish roots in a financial life? Now, Bro, that was your homework, to figure out what you do when you can't get a credit card.

Robert Brokamp: Well, first thing, some people think that if you use a debit card, if you deposit money in your bank and you said, that will establish credit. Generally, it won't. Even if you swipe it at a store and hit the credit button, that doesn't do it. What you might need to get it what is called a "secured credit card."

It's similar to a debit card in that you have to send money to the credit card company first, then, that's your spending limit. But then, many of these cards, after you have maintained that and paid off your bills for 12 months, it becomes a regular credit card. And actually, I'll point people to a great article from NerdWallet, recently, by Virginia McGuire -- "Best college student credit cards of 2016" -- because she did a great job of actually highlighting specific cards that are good for students in specific situations, even those who have good grades. So, I would definitely take a look at that.

Southwick: Alright!

Brokamp: But I will say, this happened to me. I didn't have credit cards when I was younger, and then when I first tried to apply for a mortgage, I couldn't get it because I had no credit record. So, it definitely makes sense to just put a little bit on a credit card, and pay it off every month.

Southwick: Step No. 4: if your job offers a 401(k), put money into it!

Weathersby: Yes. Not enough people take advantage of that.

Southwick: Which is crazy, right?

Weathersby: It is. It's crazy, when you think about it. Just make sure, not to use a clichéd term here, but, don't leave money on the table. If your job is saying they'll match, say ...

Southwick: 7%.

Weathersby: Yeah.

Southwick: Of, I don't know, what's average? Do you know?

Brokamp: The average is $0.50 on the dollar, up to a contribution rate of 6%.

Southwick: I knew Bro would know. I knew I could look at him and ask.

Brokamp:
At 6%, the company throws in another 3% for a total of 9%.

Weathersby: And then you're good. Don't leave that extra 3% on the table.

Southwick: So, if it comes down to, even paying off student loans or paying off high-interest debt, do you still put the money into your 401(k)?

Brokamp: Student loans, yes. Credit card debt, it really depends on how big it is and the interest rate. If you're paying 20%, 25%, 30%, it's pretty hard to beat that by putting money into a 401(k) and investing it. Plus, there's a psychological value of just getting rid of the debt.

Southwick: Right, off your back.

Brokamp: Do everything you can to get rid of the debt, then start new.

Southwick: Step No. 5: increase your financial literacy. Learn, learn, learn. Johnnie, you have a favorite book that you wanted to recommend.

Weathersby: Yes, there's this book called "How to Invest $50 to $5,000." And there's other stuff in the name.

Southwick: I can give you the full title: "How to Invest $50 to $5,000: The Small Investor's Step-by-Step Plan for Low-Risk Investing in Today's Economy."

Weathersby: Boom. That book.

Southwick: (laughs) I don't know how you didn't have that whole title memorized, but ...

Weathersby: But that book, it's a fun read, it gives you very good, practical advice. And it's talking in terms of money that you can easily have on hand, even if it's something where you don't make a lot of money and you don't have a lot to set aside. The first thing it deals with is $50. You can squirrel away $50. Just try, believe in yourself, $50.

Southwick: Johnnie believes in you! Bro, do you have a book you want to recommend? I know I'm always looking to you for book recommendations. Do you have one?

Brokamp: "Stocks for the Long Run" by Jeremy Siegel is a great history of investing, not just in stocks, but in all kinds of investments. You also learn about the history of the Fed and the economy. It is sort of textbook-y, but very enjoyable. I originally listened to it has an audiobook, and I think it's a great idea.

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