If you’re a recent graduate, you’re probably wondering how you’ll be able to build your credit so you can move on with adult life after college. Chances are strong that you built almost no credit history while you were in school. Now, you’re faced with the age-old dilemma: How do I get credit when I have no credit? It’s not always easy, but it can be done.
Everyone starts out with no credit history. Yet, you’ll need a good one if you want to rent or buy a home, purchase a car, or obtain a credit card. Having a good credit history tells a potential lender or property owner that you have handled your money responsibly in the past. The better your history, the less you’ll pay in credit interest. There are a number of ways to build your credit history; let’s look at a few.
Have a Family Member Help You Out
If you have a family member who has good credit and is willing to help you out, you can have him or her add you as an authorized user on a credit card account. You won’t need to apply for a credit card account together; the cardholder will just request that you be added to the account. It’s not even necessary that you use the account. As long as the account holder keeps the account in good standing, you’ll build your credit alongside the cardholder, assuming the issuer reports authorized users to the credit bureaus. It’s important that you treat this situation with the utmost care because if you don’t act responsibly with the account you could potentially damage the credit of the primary cardholder. On the other hand, if the account owner quits paying the bill, it could damage your credit as well.
You could also ask a friend or family member to co-sign a loan for you. This means that the family member agrees to be responsible for the loan too, and responsible for ensuring it’s paid timely and according to its terms.
Most banks will approve a loan for you if you have someone with stellar credit as a co-signer. You must understand, however, that this person is putting his or her credit on the line for you, and is agreeing to be legally responsible if you fail to make the payments or default on the loan. It’s important to think this situation through carefully to avoid putting any friend or family relationships at risk.
Apply for a Starter Card
Many companies offer a card specifically for those who are new to credit cards and trying to build a credit history. They’re a bit different from traditional credit cards in that they usually have a very low credit limit and a higher interest rate. These cards usually don’t offer any reward points or other incentives, and they may also have an annual fee.
Another type of starter card is called a secured card, for which you make a deposit that covers the amount of credit the lender is extending to you on the card. This way, if you fail to make the payments on time, the lender can deduct the amount owed from the deposit. For example, many secured cards will start with a low credit line such as $300. You would make a deposit of the $300 and the lender would hold that as security against the card. You would be able to utilize the card to make purchases up to $300. Only if you didn’t make your payments on time would the deposit of $300 be used to cover your payments. Your payment history is reported to the credit bureaus, so if you do a good job in handling the card, you’ll begin to build a good credit history.
Apply for a Student Credit Card
Student credit cards are designed especially for students trying to build their credit for the first time. They’ll usually have a low credit limit and a little higher interest rate, but students can usually gain approval with little to no credit history. The reward programs are usually sparse, but that shouldn’t be your primary concern anyway.
Most cards require or prefer that you be a full-time student. One of the upsides to these cards is that if you handle them well, you can usually upgrade to a better card with a higher credit limit and a lower interest rate once you graduate and begin working.
Apply for a Retail Credit Card
Some of the easiest credit cards to gain approval for are retail credit cards. You surely been approached by many a sales clerk imploring you to take advantage of discounts and sales by signing up for a credit account. These cards, while easy to qualify for, usually have high interest rates, so be careful not to run up a big balance. The best way to utilize retail credit cards is to make small purchases that you can pay off right away. By paying your balance in full and making your payments timely, you can turn store credit cards into a credit-building goldmine.
Shop around a bit to see which stores you shop at offer the best interest rate and discounts. Many store cards offer rewards and special access to sales and discounts.
Look into a Credit Builder Loan
If you need a loan for something important, try applying for a credit builder loan. Credit builder loans are usually small in amount and are simply personal loans where the bank lends money on a signature.
Don’t secure a loan if you don’t truly need it for something concrete, because you’ll pay interest on the money and likely some application fees. However, if you do need a small loan, these loans can be a good way to build a credit history. It’s probably best to wait until you have a job before taking a loan, though, as it’s extremely important to pay the loan back in accordance with its terms.
Do Student Loans Help Build a Credit History?
If you took out student loans to complete your education, and you’ve been paying them timely and according to terms, then your loans will indeed help you build your credit history.
However, you shouldn’t rely on student loans alone to build up your credit; utilize some of the other methods here to build your credit quickly. Your credit score is calculated by considering a number of factors, but the mix of your accounts is one of them.
The Importance of Building a Solid Credit History
While you can probably get by with a limited credit history when you’re young, as you get older and want to get more independent, a credit history will be important. When you want to buy a car, you’ll pay much less interest if you have a solid credit history. Moreover, when you move on to even bigger purchases such as a house, having a good credit history will be critical. Just being able to get a small reduction in your interest rate on a 30-year mortgage can add up to huge sums over the life of the loan.
Even if you’re only interested in renting a home, most property owners will want to check your credit before entering into a lease with you. Having poor or non-existent credit could cause you to pay more in rent, or cause you to rent a place that’s not up to your standards. While it may seem unfair, property owners have the right to deny you housing based on your credit history.
Another thing that may be affected by your lack of credit or your poor credit is your ability to get a reasonable premium on your car insurance. The same goes for insuring your home or even renter’s insurance. Many employers also will check your credit as part of their pre-employment screening, and may not offer you a position if you have poor credit. Employers, in many states, view credit history as a way to predict what type of employee you might be. Irresponsibility with money tells them you may not be the ideal employee.
How Long Will It Take to Build a Credit History?
If you do the right things and pay your accounts on time, you should be able to build a decent credit history and score with a couple of years. However, since credit mix is part of the total picture, you should look to open a few different accounts over time to diversify your credit picture. The most important thing is to be on time with all of your payments. Late payments will stay on your credit for a very long time. Getting your credit score up to the “Excellent” level will take several years of superior money management.
Those with high scores of 800 or better usually have had immaculate payment history for more than 10 years. This level makes up only about 10% of all consumers.
This is why it’s important to start building your credit history as early as possible; then, when you’re ready to make a big purchase such as a home, you’ll have the credit score you need to get the best terms. Again, while it can take years to build an “Excellent” credit history, you can build a “Good” one in just a couple of years.
The Most Important Factors Influencing a Credit Score
Your credit score is made up of a couple different factors.
Payment history is the most important factor in determining your credit score. The credit bureaus will weight payment history as 35% of your total score, so make paying your bills on time a priority.
The second biggest factor influencing your credit score is the total amount of money you owe. It’s important not to borrow too much money too fast when you’re trying to build your credit. Keep things small and pay your balances off regularly. Aside from negatively affecting your credit score, too much debt makes life tough to manage on a number of fronts.
The third most important factor influencing your credit score is the length of your credit history. Again, that’s why it’s important to start as early as possible with credit. Length of credit history accounts for 15% of your total score.
The rest of your credit score is influenced by factors that make up small percentages, such as recent credit and the types of credit you have. While all the credit bureaus have different algorithms they use to determine your credit score, you can use the above as a general guide.
Building your credit seems complex, but it really isn’t hard to understand at all. As you can see, the major influences should be easy to manage if you’re handling your money responsibly. Paying your bills on time and not borrowing too much money should be priorities for you even if you’re not thinking about your credit score.
Graduating and going out on your own is an exciting time full of new opportunities and experiences. It can also be a time of trepidation as you take on adult responsibilities and start building your life on your own. Don’t let building your credit get in the way of enjoying this important step in life. It’s not hard if you just focus on doing the right things.