Three very different people. Three very similar credit situations.
On one hand they are extremely risky to a lender as they have no established history showing they pay people on time. On the other hand, they are a lender’s best opportunity for they will need to charge higher interest rates. No matter which of these three you are, its time to take control so you can get approved for the credit you need and don’t have to pay the highest prices for it.
First, let’s clear up some common misconceptions. Things that do not build someone’s credit: rent (almost never), utilities, cell phone bills, insurance, checking accounts, debit cards, having money in the bank. Sorry, they just don’t. Sadly, while paying these bills wont give someone credit for paying them, many of the above can show up on a credit file as negative items if they don’t pay.
So, what does build credit? Basically, borrowing money and paying it back to financial institutions that report to the credit bureaus (Transunion, Equifax, Experian).
I get money for signing a paper? Where do I sign?!
To be eighteen again…
It’s almost never too early to start establishing credit as a young adult. The sooner you can establish your credit history as positive and get that awesome FICO score we all want, the better off you will be.
A minor cannot enter into a contract so teenagers younger than eighteen cannot take out their own credit card. However, there is a loophole: parents can add children onto their credit cards as “authorized users” before they are legal adults. This does not make them a “co-signer” on the account, it just sends them a physical card that when swiped, adds a balance to your existing account. The parent is still 100% responsible for the account, but the credit information will show up on the teenager’s credit file, allowing them to get ahead of the game.
Then once you are eighteen and have your own income, you can move onto getting your own credit card, your first car loan, student loans, etc. and it will be much easier. If your parents didn’t or couldn’t give you this advantage, its okay, you will catch up.
First of all, join a credit union. You just cannot get the service and knowledge that credit union employees have to offer at a corporate bank. Seriously, walk into your corporate bank and ask the banker the break down of the FICO score. They are simply not trained to know these things. All you usually have to do to joint is put a small deposit in a savings account.
Take out a secured credit card as soon as you are an adult. Secured means you will have to give the institution a deposit as collateral in case you don’t pay. It still builds credit just as well as any other card or loan.
Six months to a year after doing that, take out a small loan with the credit union either in the form of a secured credit builder-type loan or a unsecured loan (personal loan). This will add to the diversity of your credit report, which is part of how your FICO is determined. They want to see different types of credit used responsibly.
If you pay this credit card and loan faithfully, you should be approaching a solid enough credit footing within a year or two that a credit union or other institution will be willing to give you a car loan if you need one (and have the income to qualify for it).
If you are going to start taking out student loans, you may not need to take out the credit builder loan as the student loans will fill that role. Just understand you need to stay on top of your student loan situation, especially if you leave school. I have seen way too many young people’s credit reports damaged greatly by failing to pay student loans, which often show up as multiple loans on the credit file.
The sad thing is, usually if they would have just stayed in touch with their lender, there are many ways to keep your student loans in good standing while not making any payment or very small payments.
Tomorrow: What to do after bankruptcy