S Stands for Starting Your Credit History
Personal Finance from A to Z
Eileen St. Pierre, The Everyday Financial Planner
It can be frustrating. You know you need to start building a credit history, but no one will give you a loan because you have no credit history. Where do you start? Here are five tips to get you started.
Use your job and residence to your advantage.
Your employment and residence histories will show up on your credit report. Try to stay at both for a few years. The key is to show stability. Put your apartment and utilities in your own name.
Get a credit card.
Start with a secured credit card with your bank or credit union if they offer one. You will need to put some money on deposit – this will become your credit limit.
- You will be required to pay an enrollment and/or annual fee.
- Some people have a hard time coming up with the initial deposit.
After using the secured credit card for 12-18 months, you may be able to move up to an unsecured credit card. This type of credit card has a much larger impact on your credit score and will carry a much lower interest rate.
Another option is to get a retail credit card, like from a department store or gas station. Make sure it is a business you frequent often. Pay off your balance on time each month.
- Don’t get insulted if they offer you a very low initial credit line like $250.
- It can be very easy to get in over your head with these cards. Only get one retail card that you know you will use. Don’t be tempted by all the discounts you’ll get by opening these accounts.
- The stores that offer these cards are notorious for not reporting to all three credit agencies. Make sure you monitor your credit report at www.annualcreditreport.com to make sure your payment history is on there.
If you are under age 21, your parents can list you as an authorized user on their credit card. Parents – make sure you monitor your child’s spending!
Take out a loan for your first car.
Many young people begin their credit history by taking out a car loan. It’s important to explore your options because many of the major auto manufacturers offer loan programs for first-time buyers and recent college graduates.
- See if your employer has a relationship with a financial institution – you may be able to have the loan amount deducted automatically from your paycheck.
- Look to credit unions for financing – they may place a higher value on maintaining a relationship with you.
- Save as much as you can for a down payment – the higher the down payment, the smaller the loan, the lower the risk to the lender.
- Consider a used or certified pre-owned vehicle. Go to reputable dealers – stay away from “Buy Here, Pay Here” lots. They charge very high rates of interest so you will end up paying a lot more for your car than it is worth.
Look to other types of installment loans.
If you have a savings account, ask your financial institution if you can take out a secured loan using your savings as collateral. If you pay it back on schedule, this may open the door for an unsecured credit card or larger installment loans (like a car loan).
Your student loan payment history will appear on your credit report. Consider your repayment options carefully. See my K is for Knocking Out Student Loans column for more information.
Finally, consider a co-signer.
Consider this your last resort, because if you do not make your payments, your co-signer is liable. It’s a great way to ruin your relationship with your co-signer as well as his/her credit score. I have heard horror stories from people who have co-signed loans for their kids, grandkids, other relatives, and even their friend’s kids.
Building your credit history takes time. Monitor your credit report to make sure your payment histories get reported to all three credit reporting agencies (Experian, Equifax, and TransUnion).
Before you know it, you will be on the road to a great credit score. But it can be easy to swerve off the road. One bad decision can really set you back. Learning good financial behaviors at the start of your credit history is definitely the way to go.