As young adults graduate from high school, most lack the financial history they need to qualify for credit cards, car loans, or even apartment rentals. Students face an uphill battle, as they need a solid payment history in order to qualify for new credit or loans. There are a few strategies that can help young build their financial record early, and create an adequate credit history over time.
Here are 3 tips that allow consumers to safely build credit, without the risk of going into debt:
Credit Builder Loans
A “credit builder loan” can be taken out at a local credit union, for the purpose of building or improving a credit score. When a borrower takes out this type of loan, the amount usually ranges from $300-$500. This money is then placed by the credit union into an interest bearing CD. It is then paid back by the borrower over the period of 3 to 6 months. After the payments are made, the borrower has the ability to collect the CD and either cash it out or allow it to accumulate interest. Credit builder loans are very low interest, so most people will be able to handle the payments without much difficulty. After the loan is complete, the consumer will have a history of borrowing and payment on their record. This alone may be enough to allow the user to obtain an unsecured credit card or loan.
Secured Credit Cards
Another way that a person with no credit can get a credit card is by signing up for a secured credit card. A secured card works exactly like a traditional credit card, except the borrower must make an initial security deposit that will be used in the case of non-payment. The credit limit of the card is based off of this deposit. For example, if a cardholder made an initial deposit of $1000, they would have a $1000 limit on their card. If used responsibly over time, these cards can help users qualify for an unsecured card. This will also help the user build up a history of payment. One negative aspect of “secured cards” is that they are known to carry more fees, than unsecured cards. These cards may have annual fees, withdrawal fees, and even customer service fees in some cases. But, one major benefit of secured cards is that they only allow the user to spend what they can afford.
Get a Co-Signer
One of the easiest ways to get a credit card or loan, without an established credit history, is by using a co-signer. Co-signers are completely responsible for any debt incurred. For this reason, co-signers usually tend to be close relatives (most likely parents). Using a co-signer to get a loan or credit card, will help an individual with no history, begin to build their own. If the loan or card is paid off promptly and responsibly, a credit history will form over time and allow the user to establish their own financial record. If the payments are not made, then the co-signer will be on the hook for the balance.
How Students Can Build Credit
Due the recent CARD ACT, it has become more difficult for students under 21 to acquire unsecured cards. This ACT allows credit card companies to approve applications only from students that can prove they have adequate income to pay for their charges. Having a parent or guardian co-sign, is a common way for kids in this age range to acquire a card and build new credit. Prepaid cards are one way that students can get the convenience of a paying with plastic, if they are having difficulty getting a secured or unsecured card.
Ross run the websiteGreat Credit Score. The site covers subjects such as credit, the economy, investments like stocks and precious metals, and personal finance.
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That’s neat about the credit builder loans. I hadn’t heard of those before. It’s a good thing they put that CARD ACT into effect. One of my friends had a credit card in college and burned through $8,000 she didn’t have just because she felt empowered by having plastic. Not a good way to start her financial “independence”
18 year old students are given credit cards and just expected they know how to act responsibly. I gave my children my credit card when they were 17 years old and left for college. I prepared them for the responsibility. They never abused the card.
Secured credit card is how I got started. Very informative KC.
There are a lot of choices now, but you still need to act responsibly.
These are great tips, Krantcents! I remember having it drilled in my head to start good credit as young as possible. I had a student credit card but I definitely used it wisely.
I think there are more options today, but it starts with preparation. You need to be ready for the responsibility.
I agree. I opened a line of credit more than 30 years ago and very happy I had it to take advantage of opportunities that were available.
When my children left for college, I had to make them authorized users because of their (17 years old) age. They handled the responsibility well because they were prepared for it. Just giving children credit cards may be irresponsible, if they are not ready for it.
Too often students are given credit cards on college campuses who are ill prepared for the responsibility. Parents need to think about helping their kids be ready for the responsibility.