Practically every guide to setting off on the right financial foot begins with the following warning: you must have good credit if you want to get anywhere.
Your credit profile helps lenders, utility companies, landlords, and sometimes even employers get an understanding of how responsible you are with your money. But how can you prove yourself through your credit profile if you need credit to get credit?
These are a few ways new grads and young people can ease into the world of building credit:
Secured credit cards are like credit cards with training wheels. Since financial institutions don’t have your credit history to tell them whether or not you’re a responsible borrower, they have you provide “security” by putting down a deposit. For most cards, your deposit acts as the limit for your card. You use a secured credit card in the same way you would use a regular credit card--make purchases, get a statement, and make a payment by your due date each month. If you fail to pay, the financial institution takes your deposit. These cards typically have high interest rates and are not meant to be used forever, but they can be a great tool for people looking to build credit if used responsibly. To build a payment history, use the card monthly and set up automatic payments to avoid missing a payment. To avoid paying high interest fees, pay the card off in its entirety each period. Over time, your credit will steadily grow!
The best way to build credit is to start building your credit history. And in the case of a recent college graduate, several have very limited credit history, if any. The best way to get started is by doing your research. Firstly, look up your credit score. Several financial institutions offer a free monthly look at your FICO score, or there are a variety of websites and apps you can take advantage of. The next step is to look for a credit card that best suits your needs. While rewards are a fabulous bonus, the most important factors of your first credit card should be a low interest rate and little or no fees. Once you find a card you would like to apply for – apply! Be sure to do your research though, as applying for multiple cards at once can damage your credit score rather than help.
After opening a credit card, it is important to not rack up too much debt. Try using this card for only the essentials. Set up automatic payments directly from your checking account or pay your card off at the end of each month in full to avoid paying extra on interest. If you continue this pattern, you will build great credit history which will have a positive impact on your credit score!
Unlike typical loans, with credit builder loans you cannot access the money until you have paid for the loan in full. For example, if the loan is $500, you’ll make monthly payments over a period generally ranging from 12 to 24 months. After this period is over, the bank or credit union tells the credit agencies that you have a positive payment history, and the funds are released to you.
One way of thinking of a credit builder loan is to consider it as a locked savings account. Each monthly payment is really being put into an account that you’ll be able to access at the end of the predetermined period of time. The benefit over a traditional savings account is that your payments become part of your credit profile.
Another way of building credit with the help of trusted family or friends is by asking someone to co-sign for you a loan. When someone co-signs a loan for you, their credit score and financial history support your ability to obtain a loan, oftentimes making otherwise impossible loans possible. For example, you may not be able to get a car loan on your own with little or no credit, but with a co-signer, you will.
However, you must make sure that you’re willing and able to make on-time payments each month, or risk driving a wedge in your relationship. Each on-time payment makes a positive contribution toward building your credit profile.
Building excellent credit doesn’t happen overnight, either. Since 35% of your credit score is based on your payment history and 15% is based on the length of time your accounts have been open, building your credit is something that takes time – but is worth it. You can’t hurry time, but you can focus on the other factors that make up your credit by keeping your balances low and making payments on time. Want more tips on building your credit?
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