For most adults, establishing credit is an important step to becoming financially independent. A good credit history is essential if you want to obtain a mortgage, vehicle loan, or other type of financing.
But if you don’t have a credit history, how do you get started? In this blog, you’ll learn some different ways to start building credit for the first time.
What Is Good Credit and Why Do I Need It?
According to consumerfinance.gov, credit is having the right to borrow money to buy something. Every time you apply for credit and then make payments toward your debt, you are “building” credit.
For young adults especially, it’s recommended to start building credit as soon as possible after turning 18. That’s because credit is an important factor when it comes to:
- Renting a home or apartment
- Obtaining a home mortgage loan
- Applying for a credit card
- Taking out a student loan
- And more
4 Ways to Start Building Credit
1. Secured Credit Card
One of the easiest ways to start building credit is to get a secured credit card, which requires a small cash deposit to “secure” the card. Most financial institutions offer them, and they’re easy to obtain.
Using a secured credit card is a great way for you (or your son/daughter) to “practice” the basics of credit card usage. The credit limit – the maximum amount you can charge to the card – is low compared to unsecured cards, and making regular monthly payments can help you get in the habit of budgeting and paying off debt.
2. Credit-Building Loan
A credit-building loan is a personal installment loan you can take out for the primary purpose of establishing a credit history. Typically, these kinds of loans are no more than $1,000, and you are required to make monthly installment payments to pay it back in a set amount of time.
Similar to a secured credit card, taking out a credit-building loan is a great opportunity to get experience borrowing and paying off debt, albeit on a small scale. One key difference, though, is that with an installment loan, each payment is the same amount each month – ideal for practicing monthly budgeting.
3. Become an Authorized User
One way to establish credit without taking out a separate loan or credit card is to become an authorized user on someone else’s account (typically a parent’s). This option allows you to have your own physical credit card, which you can use to make purchases with the account owner’s credit card account.
This option allows you to start your credit history without actually applying for your own line of credit. The account owner is ultimately responsible for paying the debt. However, it’s strongly recommended that you and the account owner establish boundaries and rules regarding how much you can charge to the account and if/how you can repay them for your purchases.
4. Have a Cosigner Back Your Loan
If you’d like to take out your own loan but don’t have an established credit history yet, you can have someone else with good credit history cosign your loan. If you cannot pay back the loan, the cosigner promises to do so.
With this option, you can benefit from the credit history of your cosigner while also establishing your own credit history. However, if you don’t pay back the loan or don’t make payments on time, you can also damage your cosigner’s credit history. Again, make sure ground rules and boundaries are set between you and your cosigner to avoid this.
More Resources for Building Credit and Financial Literacy
- Build My Credit Tool (FDIC)
- How Money Smart Are You? Game (FDIC)
- Financial Terms Glossary (consumerfinance.gov)
- Credit Reports and Scores (consumerfinance.gov)
Financial Literacy at Minster Bank
Minster Bank is an advocate for financial literacy in the communities we serve. From visiting schools to talk to local students to offering resources to young adults, we’re here to help you learn. Visit the Minster Bank blog for more articles like this one, or follow Minster Bank on Instagram for bite-sized financial tips just for you.