Five Ways to Establish Good Credit
Proper Financial Habits in College Can Set Students Up for Future Success
Surely, you’ve heard that to establish good credit you need a credit card, only to be told that you can’t have a credit card till you establish good credit. Huh? Sort of like you can’t get a job without experience, but you can’t get experience till you get a job. These conundrums are known as a catch-22 and though they may seem to be an unworkable problem, there are ways around it. Read on to find out the how and why of establishing good credit.
The first step is to understand why we want good credit. We know you’ve often heard this but take the time to truly understand why it’s important. There are some sacrifices, but if you know the tangibles it will provide the motivation to make the right moves.
Why You Want to Establish Good Credit
Credit cards offer convenience, emergency access to funds and facilitate online purchases. But the most important aspect, especially if you’re a college student, is that they allow you to build good credit. The value of this may not be immediately apparent, but down the road a strong credit rating allows you to access bigger loans for longer periods of time for some of life’s essentials, Obviously, we’re talking car loans, mortgages, apartment leases and maybe even a business line of credit, if you’ve got that entrepreneurial spirit.
How to Establish Good Credit
If you haven’t already established credit, here are several ways to get the ball rolling, each with its own terms:
- Find a Co-signer
This is probably the easiest path to establishing credit. Have someone you know agree to be a co-signer on a loan that you open. Maybe your parents, a cousin or a rich aunt or uncle. By them agreeing to co-sign, the lender has the assurance that the loan will be re-paid and you’ll get credit for being part of it all.
- Become an Authorized User
Find someone close to you who’s willing to add you as an authorized user on their card. By doing so, the timely payments on that card will become part of your payment history. Of course, be sure that the person you ask has their own bona fide good credit history. You certainly don’t want to become part of bad credit narrative.
- Get a Secured Credit Card
This option is a bit different than the previous in that you have to first deposit money into a secured account that the lender can access if you fail to pay your credit card bills on time. Some people fail to see the point of using your own money to securely borrow other money. Keep in mind, however, that this is not intended for long-term use (usually only six months to a year). And the amount you deposit can be as little as $200. Instead think of it as a way to demonstrate your ability to pay credit card bills in a timely manner.
- Open a Credit-Builder Loan
for most people this is the least-favorite option. It amounts to borrowing money that you can’t use, at least for a short period of time. The way it works is that you take out a loan and deposit the proceeds in a secured account that you cannot access for several months. But by making the monthly payments you are building a credit history and most lenders will allow you to begin to access some of the funds after a short while. Yes, you are paying interest on money you can’t touch, but if you can’t find a co-signer, then it’s a small price to pay in order to reap the large benefits of establishing credit.
- Get Credit for the Bills You Already Pay
Sometimes the easiest solution is staring right at us if we only take the time to look. If you’re already paying bills such as utility, phone, internet service, etc., there is a way to capture that information and report it to the major credit-score companies. This way you can derive a benefit from what you already do! To accomplish this you need to contact companies such as LevelCredit or Rental Kharma and they will assist in getting your good payment history to the right parties. There is a fee and you want to be sure that it’s reported to the three major credit-score companies, but if none of the other options work for you, then this is one more way to build your credit.
All these caveats may make you feel that credit cards are not worth the trouble, but they are … especially in today’s world where convenience, flexibility, and a good credit score are essential for many of life’s activities. You just want to be sure that you avoid the obvious mistakes. Here are some statistics that will help to keep you focused on the best way to handle a credit card account:
- Half of all college-age cardholders got their first card at 18 years old
- One out of four has more than one card
- Four out of five don’t pay the full balance each month
- The average balance is over $2000
Once you begin to build your credit, be careful how you use it. Hopefully, you will limit the number of cards you have (not to mention the applicable credit limit) and pay off the balance each month. After all, you went through a lot of trouble to build your reputation as a credit-worthy individual. Don’t blow it through carelessness and excess. Good luck!