Entrepreneurial and Under 21? You'll Need to Build a Credit Record

Dear Your Business Credit,

I need a credit card to get credit history, because I want to open up a carpet cleaning business. I am only 20 and just got a job at a local grocery store. How do I start? Do I get a checking account or savings account? Then what credit card is good to start with so I can get a credit history? I need credit history for the carpet cleaning program I want to do.

- Leo

Dear Leo,

You're starting in the right place -- with a steady job. Those regular paychecks will help you achieve your other goals if you can stick with a savings plan.

For starters, I'd recommend that you open both a checking account and a savings account at the same bank. Use the checking account to pay bills and set up an automated transfer of a portion of your income from the checking account to the savings account to keep your savings separate. (You can automate savings at many banks by logging into your account online and using the settings to choose how much you want to transfer to your savings account and how often you will transfer it.) Even if you save only a small amount at first, you'd be surprised at how fast your savings add up. Keeping your savings separate, instead of with the money you set aside for your expenses, can help you avoid the temptation to raid your kitty.

How much should you save? That depends. If you are still living with your parents, you may have more available cash to save than if you pay rent on an apartment. The median pay in the U.S. for a grocery store cashier is $27,659, according to salary.com. Let's say you make that much. If you tucked away 10 percent of your gross income every month, you'd end up with $2,765, plus whatever interest you earned, by year's end. If that seems daunting, aim for 5 percent of your gross income and gradually increase the number as the year progresses. You need to keep some of your saving as a cash cushion, to avoid falling behind on your bills if something unexpected happens, such as your car needs a repair. I would try to build up to at least $1,000 in savings in your emergency fund this year.

It sounds like you are looking to buy a carpet cleaning franchise. If so, ask the franchisor how much "liquid capital" you need on hand to buy the franchise, as you will need to factor that into your savings goal. Franchisors often set minimum requirements for this. Even if you finance a franchise with a business loan, the franchisor will typically want to see that you have enough money in the bank to cover the day-to-day expenses during the startup period. It can take longer to win customers than many new business owners think, and franchisors don't want you to have to close your doors prematurely because you ran out of money.

Getting a credit card to establish a credit history is important if you want to run a business, but because you are under 21, there's a hitch. The Credit Card Accountability Responsibility and Disclosure Act of 2009, usually referred to as the CARD Act, prevents consumers under age 21 from getting a card unless they demonstrate that they can pay the debt independently or have a co-signer. Since you have a job, you may be able to meet those requirements. You may want to consider a special kind of card designed for people who need to build a credit history: a secured credit card. Once you build up some credit history, it will be easier to switch to a more traditional type of card.

To build your credit history, use your credit card for some small purchases that you would have made anyway that month and pay the balance, in full, on time. Set up email reminders that a bill is due through your account, if possible, so you don't forget. Avoid using the card for impulse buys and splurges. It's fun to treat your friends to dinner or a round of drinks, but carrying a balance could leave you in a bad situation if something unexpected happens, such as the grocery store cuts back your hours during a slow period. One reason the CARD Act limited access to credit cards for young adults was to prevent them from running up debt that they couldn't pay and damaging their credit history for years.

Using a credit card responsibly is not the only way to build your credit history. Experian, one of the major credit bureaus, includes on-time rent payments in your credit score. However, in order for Experian to consider this information, you must pay rent to a major property management company that reports directly to Experian's RentBureau Service or you and your landlord have to set this up. For information on how to do that, go to Experian's RentBureau Web page.

Good luck with your new job and the carpet cleaning program. Planning ahead is a good way to turn your entrepreneurial dream into reality.