Despite the fact that almost every person says a credit card is the best way to build credit, it is actually the WORST way to build credit.

This is because of the way credit companies in North America market their products and attack their primary initial target market - students. Credit companies set up kiosks at colleges and universities and offer incentives like free t-shirts and lunches to get students to look at their card packages.

Before they know it, they've signed a contract for a $2500 credit card when they have absolutely no income (or very little). The introductory rate is fantastic (usually something like 6.9% for the first 12 months), the company seems flexible and fun, and you now have $2500 of free money!

But what you never read is the fine print. If you are late by ONE MINUTE on any payment, the credit card company has the legal right to increase your interest to 24.9% and charge you a huge penalty. (Some of my friends had payments go from $23 a month to $100 just because of the interest change).

So now you're paying over 3 times as much interest on anything you purchase as you initially were. The biggest problem: Nobody uses their credit card to make purchases that appreciate in value! We buy clothes and food and movie tickets, all things that are worth nothing or close to it after they're used just once! And we end up paying 2-3 times the sticker price because of the interest on the credit cards.

Finally I arrive at the number one best way to build credit. When your son or daughter turns 18 years old, you should take them to your bank manager and set up something along these lines:

Have your son or daughter take out a loan for $1000 - $3000. The terms of the loan should be as such:

This loan will be used in its entirety to purchase either a savings bond or GIC product offered by the same bank issuing the loan to be held as collateral against that loan for the entire term of the amortization.

Spread out the loan in even payments over 1-3 years. Small amounts so that it is very affordable.

What you will end up with is 1-3 years of credit history making consistent payments, an easy loan because the bank OWNS the collateral for the loan, and finally the best part: a $1000 - $3000 savings bond or GIC at the end of the term.

Now there's one final perk to this little credit-building trick: If you are charged 10% on a loan, but your investment makes you 4.25% over the term, you are only actually being charged 5.75% NET!

So if you invested $3000 of the banks money and took a loan for it, what you would end up paying in the end is only around $350 to build 3 years of credit history AND end up with an investment toward your net worth!

Now that sounds a thousand miles better than paying $1500 extra for a bunch of stuff you wouldn't notice going without in the first place.

Learn more about this author, D. Blain.
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