How to Establish Credit and Raise Money

Seventeen-year-old Angeil Brown of Houston, TX has always liked taking pictures. After enrolling in a photography class at school, she and nine of her friends decided to turn their love of photography into a business.

Angeil and her fellow entrepreneurs needed cameras, developing equipment, and plenty of film — things that cost a considerable amount of money — but weren’t sure how to raise start-up capital (cash) for their business. With no established credit, their chances of borrowing money were slim. They had to find another way. 

Fortunately, one of Angeil’s teachers gave them the idea of selling stock in their company to interested parents, friends, and teachers for $1 per share. In return, stockholders would evenly split 10 percent of the company’s profits. “It’s a win-win situation,” says Angeil. “As business owners we are able to cover our expenses and, at the same time, our investors make money when the company profits.” To date, they have raised between $200 and $300 in capital.

Whether you finance your business like Angeil did or you just want to use credit to get a new school wardrobe next fall, you’re still using someone else’s money.

Danger Signals You know you have a credit problem when... You can’t scrape together the $20 minimum credit card payment each month. That great outfit you bought last week went out of style exactly three seconds after you paid for it and is now lying on your closet floor. You’re using a credit card for necessities like hair gel and snacks because you have no cash. You have to avoid your friends at school because you owe them money. You’ve been reduced to begging your parents for chores in order to make money to pay off your bills. You had to pawn your CD player to pay for all those cool CDs you bought last month. Your parents give you funny looks when you leave for school wearing a $500 leather jacket, but ask them for lunch money.

Need to Borrow Money?

We often hear people say “I’ve got good credit,” which means they have the ability to borrow money. Sound easy? It is if you’ve established yourself as creditworthy — someone a lender can trust. But most lenders want to see a favorable credit history — a list of past instances of
successfully paying back a loan — before lending money. If you’re young, you probably don’t have a credit history.

Did you know that credit card purchases are loans? When you apply for a credit card, you are essentially saying to a lender, “I may want to purchase certain items using a credit card.” If approved, the credit card company issues you a card with a limit on how much you can spend.
You can then use the account to make purchases whenever and wherever you like as long as you don’t exceed the credit limit.

What’s the Catch?

Because of interest and other credit card fees, you end up paying more for items using credit than if you just paid cash. Interest is the money you pay the lender for loaning you the money. Interest is always expressed in a percentage and it may be quite high, even if you’re only
borrowing a small amount for a short period of time.

Let’s say you borrow $100 at an interest rate of 10 percent. Since 10 percent of $100 is $10, you will be paying $110 when you pay back the loan. Lenders make money from interest, which can be 15 percent or even higher. That is why it’s important to shop for the best interest rate.

Are Credit Cards Worth It?

If you run up a bigger bill than you can pay, a credit card can get you into trouble. However, when used responsibly, a credit card can be a useful tool. Angeil believes that a credit card may teach teens how to manage their money, although they may initially make some mistakes. To avoid costly errors, decide on your credit policy in advance. The most common reasons responsible cardholders give for using credit cards are for record-keeping, convenience, or emergencies.

In his book The Totally Awesome Money Book for Kids and Their Parents (Newmarket Press, 1993), 16-year-old co-author Arthur Berg Bochner explains that many businesspeople use credit cards to pay for business expenses so they can have a record of their spending. Some people use a credit card to avoid carrying cash when they travel or shop. Others only use their cards in emergencies (an unexpected car breakdown, for example). These are good ideas as long as you can pay the balance off each month to avoid interest payments and other charges.

In his book, Arthur cautions against credit card offers that encourage unnecessary spending, such as “spend and save” cards that give you cash back on purchases. He also warns against using credit cards to buy luxury items or fast food.

For additional credit information, contact Money Management International. This non-profit organization offers online help at www.mmintl.org, or call their toll-free consumer hotline 24 hours a day at (800) 762-2271.