Living with your parents is a good idea when you have school, bills, and possibly some student loans to worry about. However, at what point should you consider moving out for the sake of your credit score? Every situation is going to be different. Although, at some point, when you want to start opening lines of credit in your own name, you might have a difficult time if all of your credit is in your parent’s names.
Are There Financial Benefits to Living With My Parents?
When you’re an adult, living with your parents and going to school makes complete sense. Finishing up a degree is a smart financial decision for your future and should take precedence over living on your own and acquiring any more debt. There’s nothing wrong with living on your own during this time, but if you have the opportunity to save money and stay with your parents for now, you’ll save yourself a lot of financial stress during your college career.
If you choose to work full time, there’s the obvious benefit of being able to save up money without having too many bills to pay. Starting to save now will make it much easier on you in the long run when you do decide to move out on your own and have more bills and rent to pay. It’s always a good idea to start saving an emergency fund in case something happens. Sometimes your bills might fluctuate or maybe your paycheck was a little lower this week than you expected. Saving some money now will help you out if you find yourself in a sticky situation later on.
Sometimes when you move out, you decide that you’d like to open up some small lines of credit in your own name, like possibly a credit card or you want to buy yourself a car. Maybe you even need to refinance your student loans, and want to get the best interest rate possible. Saving money now can help you get ready for a possible down payment on a new vehicle or could pay the deposit for a secured credit card. These are the types of things we tend to overlook until it’s actually time to apply for the line of credit. Then, when we’re approved, we don’t have the money to back it up, or the interest rate is higher than we can afford or justify taking on. Save now and you’ll thank yourself later when you make some of those big decisions down the line.
Why Does My Credit Score Matter?
Having a bad credit score, or no credit history, can cost you money. You may be forced to pay for everything in cash or by debit card, hurting your savings and limiting your ability to make larger purchases. Your credit score also helps lenders determine what interest rate to charge on loans, credit cards, and other forms of debt. You need to build your credit history up to save money, and to expand your purchasing power.
Let’s say you decide to move out and you’re ready for a little bit more financial responsibility. If we use the example from above, a secured credit card, you can start working on your credit while being able to spend some credit every once and awhile. Secured credit cards are great because you don’t have to worry about much of the hassle of a regular credit card. The limit is usually pretty low, about $500 or so (sometimes less, sometimes more), and you have to pay a deposit in order to secure the card.
In the instance of the $500 card, you’d put down $500 as a deposit, then the bank would open up a line of credit equal to your deposit. You’d have that much to spend and you’re obligated to pay it off when it’s due, just like any other credit card. Every time you make an on-time payment, that transaction will be added to your credit history, which will positively influence your credit score. If for some reason you weren’t able to pay off your debt on the credit card, your deposit would be used instead. However, that wouldn’t look good on your credit history.
Learning how credit works and slowly building up a positive credit score will help you when you decide to make larger purchases later, like buying your first car or even a house later on. The purpose of a credit card isn’t to max it out, it’s to show the bank that they can trust that you are a responsible spender that stays within their limits and can make the payments on time. You should try to keep your balance very low and pay it off quickly. If a bank is going to trust you to make a larger purchase later on, it’s good to know you can handle things like this first.
When Should I Think About My Own Credit?
Right now! You don’t have to be planning to get a loan or to make a major purchase for building good credit to be worthwhile. Having a credit card is a good financial decision for your credit score. Whenever you decide that you’re ready to apply for one (or any other line of credit) you usually need to actually have a credit history. Most banks and lenders won’t lend to someone that has no history of positive credit use. Again, a secured credit card is great for this because anyone with bad credit or no credit can usually find a card that suits them and they are easy to be approved for.
How to Build Credit on My Own
As such, if you’re looking for a way to build your credit without your parents, you can probably get approved by yourself. Although, I don’t suggest doing it if you’ve already got a lot on your plate. If you think there’s a chance that you’ll forget a payment or that the option of maxing out your card is too tempting, now is not the time to apply. Both of those issues will only hurt your credit score and will make it even harder to be approved for a larger loan later.
Getting approved for a secured credit card doesn’t depend on living with your parents or not. Once you’re eighteen, you can apply for any loans you’d like by yourself. However, if we take the car scenario from earlier, this could be a problem if you’re still living with your parents and you have no credit. Don’t get discouraged though. You definitely have some options.
First, if you can wait for a while, you can go the secured credit card route. Start building credit for yourself and start saving for a down payment. You can check your credit score for free once per year in order to get an idea of where you’re at. Communicate with your potential lender and check to see if they think you’re in a good credit range before you apply for a loan.
How Can My Parents Help Me Build Credit?
Next, you can ask your parents to co-sign a loan with you. This might actually be a better idea if you’re inexperienced with loans, interest rates, and monthly payments. Credit cards, for example, come with interest rates. Just like on the secured credit card we talked about earlier, you’ll also be charged interest with each purchase you make. Same goes for a car payment. You’ll be responsible for the monthly payment due and any tacked on interest each month.
Co-signing can be a way to get the best of both worlds: saving money while staying at home, but building up a credit history so when you are ready to move out, you can. Your parents will be able to help you get approved for a loan by co-signing if you don’t have any credit. This means that their credit will be affected in the same way that yours is. When you make a payment on time, your credit history and your parent’s will be positively affected. If you fall behind on the payments, both of yours will be negatively affected. You are both responsible for paying off the amount by the agreed upon time, so make sure you’re up to the task.
Living with your parents certainly does not hurt your credit score, but it doesn’t necessarily add any positive items for your credit score either. Living with your parents is a good way to save up money and pay off any debts you may or may not already have. However, choosing to take a leap of faith and get your own line of credit, car, or home can drastically improve your credit score over time. Living with your parents for too long could cause you to miss out on some opportunities to boost your own credit score.
Find more ways to build your credit at our credit score resource center.
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