Building credit for beginners

As long as a credit card is being paid off in full each month, your credit score will rise.

Photo illustration / Jonathan Bainbridge / Reuters / File
Two MasterCard credit cards are shown. If you've had trouble with identity theft, it's a good idea to keep watching your old card, even if you're not actively using it anymore, writes guest blogger Trent Hamm.

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.

1. Switching credit cards
2. Accepting pay for articles
3. Building credit
4. USPS refund on principle
5. Marriage and alcoholism
6. Roth 403(b) contributions
7. Reaching a teenager financially
8. Student loan repayment
9. Victim versus doing it yourself
10. Meatie versus veggie

From Thursday through Sunday, we had two house guests who traveled nearly 2,000 miles to see us. From Friday through Sunday, we had two more guests. On Saturday evening, we had three additional people over for a dinner party.

Not once did we eat out, although we did have to make an extra grocery store trip. Our cost per meal per person over the entire weekend was about $1.50, and virtually every guest seemed to be happy with everything we served.

We’re getting good at this. Are we ready to host an extended family Christmas event? Maybe not.

Q1: Switching credit cards
My husband and I are in our mid-twenties with no debt. No student loans, no CC debt or car loans. We each have a small retirement account through our respective jobs although we plan on moving in the next couple years so I can go back to grad school. I have a credit card through a certain large bank that I’ve had since I graduated from high school, approximately seven years ago. I use it occasionally, about 6-10x/month as a way to add to my credit history. Problem is, my number has either been hacked or stolen three times in the past year so I’ve had to get a new card each time. It’s a very big pain and the bank’s customer service is terrible and I’ve gotten the run around each time having to dispute the charges.

Would it be worth canceling this card and getting a new one through our credit union? I don’t have a problem with interest (it’s lower through the CU though) since we pay it off each month. My husband and I each have a credit card through Wells Fargo that we opened when we were in college but haven’t used in about two years since we no longer bank with WF. I’m worried since we’re young (and the husband doesn’t use any CCs) canceling would hurt our credit score when we start looking for a home in the next five years. We only use a debit card for all our other purchases. What do you think?
- Carla

If I were you, I’d simply stop using the card for now and delete the card number from every online service where it appears. Then, I’d apply for a different card (while leaving the old one open), probably one from a different financial institution (like your credit union). In a few years, you can cancel the old card with minimal impact on your credit.

There seems to be some identity theft issues going on here. Usually, such issues occur when someone uses the card at a bogus or disreputable website. You might want to also consider carefully monitoring how both cards are and will be used.

I’d also keep a careful eye on the old card, even if you’re not actively using it. Just because it’s not in active use doesn’t mean the number’s not out there somewhere.

Q2: Accepting pay for articles
Do you accept payments for writing articles on certain topics on The Simple Dollar?
- Bill

I never have. I won’t say I never will, but I have yet to see an offer that would make me happy doing that and I don’t imagine that I ever will.

Simply put, I don’t sell the content of The Simple Dollar. It’s a place where every editorial word is written by me (or, on very rare occasions, by someone I trust) and the content is not being decided by a corporate entity beholden to the owners or shareholders.

If I’ve learned anything about blogging, it’s that the one thing that makes it more vital and valuable than other media sources is the genuine connection with the writer, someone who is sharing what they honestly know and think and value. If that isn’t there, why not just go read CNN or the Wall Street Journal?

Q3: Building credit
I am a 24 year old, recent graduate from college and have a job in the non-profit sector making a salary in the low $30k’s. I have a question about building my credit score. I have had a credit card since I turned 18, had student loans that were deferred throughout college (and actually paid off before payments started), a cell phone bill in my name, and rent on an apartment in my name. My car is paid off, I’ve never been late with a payment, and I have no debt except for a credit card bill that I pay off each month. My parents keep warning me that if I don’t have some sort of debt, like a car loan, or other bill that I pay in monthly installments (along with the corresponding interest), my credit score will not improve and might even become prohibitive when seeking a home loan down the line. I’d like to think that financial prudence and paying off my credit card each month would look good in the eyes of creditors. Are my parents right?
- Eric

Your parents aren’t right in this case.

If you have a credit card that you’re paying off in full each month, your credit score is certainly going up. Each month that goes by, the length of your credit history grows longer (up to a seven year cap), and that credit history length is a key part of your credit score.

Will you have the maximum credit score? Probably not. Will you have a pretty good to great one, one that gets better each month? Absolutely.

Your parents are right in that many lenders will look at your credit score first and foremost to make a snap judgment about whether to lend to you. However, based on what’s publicly known about credit scores, I think you’re doing just fine.

Q4: USPS refund on principle
I recently mailed my tax return through USPS. I had the mail certified & requested an electronic delivery receipt and I was charged accordingly.

Nevertheless USPS did not send me the electronic delivery receipt and I could not figure out from the IRS if my tax return had reached them. Finally about 3 weeks after mailing the return it showed up as received on the IRS site. However the USPS site still did not show the delivery confirmation.

My question is – Should I ask USPS for a refund of the money they charged me for this service, although it is $1.10, for principle sake – especially if for 3 weeks I was pondering listing my SSN & other details under ID protetion as I assumed the tax return was lost.
- Sachim

The first thing I would do is check the product refunds page for the Postal Service. However, I’m pretty sure that service isn’t eligible for a refund.

I agree with you that this is an example of poor service. I can name lots of examples of poor postal service in my own life. However, I will say that at least 99% of the service I’ve been involved with using the USPS has been perfectly fine.

If you wanted it to be there more securely, the best way is to e-file.

Q5: Marriage and alcoholism
My husband and I married late last year. Since the marriage, he’s quit his job and now is drinking heavily. I am support us and his stepson (paying the child support).

It’s agreed that he needs to go to detox and possibly rehab. In the meantime (he plans to go in a month), he’s going to get a part-time job to start covering child support.

My problem is … how is the best way to cover what will surely be the astronomical costs of detox/rehab? We have insurance, but our CYD is $2000. If he relapses, I plan to exit (of which he is aware). I’m already paying the mortgage and all household expenses (even though it’s all in his name).
- Jess

Your marriage desperately needs counseling right now. If issues like “I plan to exit” are on the table, there are some very deep issues going on that need to be resolved very quickly or else the marriage will spiral out of control.

I’m not sure what the best way is to cover the cost of the detox or rehab at this point. Is it even covered by your insurance?

Most likely, you’re going to simply have to come up with that $2,000 out of pocket. One route might be to negotiate a payment plan with your service provider.

Q6: Roth 403(b) contributions
Currently I have 10% of my pay going into it and 2% going into a Roth 403(b). My employer contributes 3% of my pay automatically and matches $0.25 for every $1.00 I contribute (up to 4% of my pay). What percentage is the best to take full advantage of my employers contributions? I will be honest math is not my strong suit and I want to contribute the most I can to my retirement.
- Winston

It depends on what you mean by “matches $0.25 for every $1.00 I contribute (up to 4% of my pay).” It can mean one of two things: either your employer only matches you on the first 4% of your pay that you contribute, or it means your employer will keep matching until they’re contributing an amount equal to 4% of your pay.

If it’s the first, then you’ll maximize your employer’s contributions by contributing 4% of your pay. That’s easy.

If it’s the second, you’ll maximize your employer’s contributions by contributing 16% of your pay. If your employer is contributing $0.25 for every $1 you contribute, then you have to contribute four times as much. 4% times four is 16%.

Q7: Reaching a teenager financially
I have been reading your blog for about 6 months and find it very informational. I was hoping you could suggest a book that my son, 14 years old, would/could read and one for my daughter, 9 years old. I looked in your archives but only found books that teach me how to teach them. I do plan to get the “Raising Financially Fit Kids”. I have tried to teach my kids to be financial good, but I do not believe I am very consistent, because they spend every dollar they get (usually the same day). I have discussed savings, credit cards, loans, but I do not seem to be getting through to them. In the past I have not been good and am still paying the price, will be for the next 25 years. I would like them to be better off and more informed then I was when I started college and working
- Crystal

It’s extremely hard to teach children at that age about the risks of personal finance because they truly don’t have the cognitive development in place to understand that kind of abstract risk, nor do they (usually) have the experience. They don’t connect spending everything they have on a new video game with potentially not being able to have food to eat. Adding a book to this equation further abstracts it.

One approach you might want to take is to encourage their entrepreneurial spirit. A book like Conversations with Teen Entrepreneurs might fit the bill here.

Honestly, the best way you can get the message across is to sit down and show them how you budget. Treat those children like they’re adults and they’ll listen.

Q8: Student loan repayment
By July of this summer, I will have 6 months of expenses saved in my Emergency Fund. Since finishing school, I have been using financial hardship forbearances while I got my house in order but this September my loans come into repayment.

Principle balance: $ 93,983.69
Interest rate: 4.125% (w/o automatic debit)
Interest rate: 3.875% (w/automatic debit)

Balance as of 12/31/10 with interest accrued: $ 99,795.74

My employer offers $4k/calender year towards my professional degree which I am one semester into with 2 years remaining. My question: should I start paying down my student loan debt in September and resume classes later, if ever? Or, should I utilize the tuition reimbursement & take classes this Fall thus qualifying for in-school forbearance although the student loan interest accrues? I have no other debt besides this.
- Lacey

The real question is whether or not you’re absolutely sure you’re on the right career path now. If you’re chasing a professional degree for a profession you don’t really want, that’s not a good choice.

If you’re sure that you are, take advantage of the deal you’ve got on your education right now and take the classes. Don’t sweat the outstanding student loans.

If you’re not sure, get out of the situation and start paying down that debt sooner rather than later.

Q9: Victim versus doing it yourself
I’ve enjoyed your posts about the scarcity vs. abundance mentality, and it got me to thinking about my two sisters who are only one year apart in age. Up until recently, both had what I call a “victim” attitude toward life. Both had experienced some difficult situations and setbacks in life and were feeling rather sorry for themselves. I tried to help but not enable both financially, and provided them each with free financial training and counseling.

One of those sisters finally decided to take action, attended the training/counseling, and has been working 3 jobs to pay off debts and has really turned her life around. She recently received a promotion and raise at one of her jobs. The other sister has never even attended the financial training/counseling and continues to have one crisis after another and call me for sympathy and help, and I am so frustrated by her choices. She refuses to take action or responsibility for her situation and instead just wallows in self-pity and negativity.

What are your thoughts about the “victim” vs. the “get it done” mentalities? I don’t understand how two sisters raised in the same household with the same values can have such divergent responses to their life situation. I wonder what “flipped the switch” for the one sister and made her finally choose to take responsibility for her own life. I wish I could find that switch for the other sister.

Do you have any recommendations for me regarding this one sister who refuses to take responsibility for her life?
- Gail

The difference is nature, not nurture. No two people are wired the same way inside their heads, regardless of how they’re raised.

The question you need to answer is whether or not you’re going to continue enabling her poor choices by giving her resources to sustain her current path or not. Handing her cash to get out of her latest jam doesn’t help, no matter how much you might want to.

Don’t be afraid to offer nonfinancial help to her and advice that encourages her to change her life, but turn off that financial tap that allows her to continue making poor choices unless you want her to continue using you as a support line to sustain things. Instead, be willing to help her if she does begin making different choices.

Q10: Meatie versus veggie
How can a veggie respect the non-veggie, i..e. meatie, partner with getting grossed out? I’m the veggie partner and when my meatie sidekick grills up a steak the house stinks for hours. The second issue is that I detest washing the dishes if there is a lot of gross, stinky grease. I think the meatie should always wash the pots and grills after cooking meat but he doesn’t see it that way. If it’s my turn to do the dishes then whatever was used gets included. We can keep working on that one but the smell is what really bothers me. And it isn’t fair to tell the meatie he has to eat out.
- Delores

My honest belief is that if you find that a simple single-person meat-based meal causes your residence to intolerably stink for hours, there’s not much room for compromise here. One of you is going to have to give in to what the other one wants, and I can’t tell you what that answer is.

I will say that such things are often roadblocks to a longer relationship. If one person engages in a behavior – even if it’s a minor one – that the other person can’t deal with and won’t voluntarily change, then you’re setting the stage for lots of problems down the road on both sides.

If your partner is unwilling to change, you’re going to have to decide for yourself what’s more important: your current relationship or the meat smell.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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