It can be quite a challenge to establish credit as a young adult if you go in to the process without a plan. There really isn’t an established playbook on how to establish good credit since there are many ways to accomplish this objective. But even if you begin the process not knowing how to start, with a little education about the credit process, you can set up an effective plan on how to establish good credit as a young adult.
The hardest part of building credit from scratch is obtaining that first credit card. While the first credit card is truly the most difficult to get it can be done and getting that first card will open doors to other credit opportunities. Follow the steps that we talk about ahead and you too will be well on your way to building a strong credit profile and solid financial foundation.
How to Establish Good Credit at a Young Age?
To get your first credit card in your own name requires the card holder to be at least 18 years of age at the time of application. If this is you, and you can show that you are employed full or part time and have an income to pay any debts on that credit card then you may be eligible to apply.
But the smarter way to establish credit for a young adult is to start off being added as an Authorized User on your Parents credit card. Ideally, you want to be added to a credit card that your parents have carried for a number of years, a card that has a small balance or better yet no outstanding balance at all, and a card that has not had any late payments in the most recent 24 months.
Getting your name added to such a card will be a good first start to building a positive credit history flowing through your credit report. Once this card has been on a young adult’s credit report for 6 – 12 months it is time to make the next addition to your credit report in the form of your own credit card.
Your second move is to obtain a secured credit card under your name only. Get a secured credit card from one of the major credit card issuers that normally will come with a credit limit of $200 – $500. If you don’t already have a checking and/or savings account then establish one now at your local bank so you can establish automatic payments on your new credit card. Use the card each month and charge only 30% – 40% of your available credit balance and pay the balance in full each month. Once you have done this for twelve consecutive months you are on your way to additional credit opportunities.
How can I get My First Loan with No Credit?
Start with the bank where you established your checking and/or savings account since you have a banking relationship with them and they see you are making regular and automatic payments to your credit card company. It may not look like it, but with your own bank accounts and your own secured credit card, you are now building a positive credit history in your own name.
Reach out to a personal banker or new accounts representative at your bank and ask them to kindly give you an overview of their personal loan accounts that might be a good fit for you. If there is a small balance personal loan that seems like a good fit, apply for the minimum amount on an unsecured personal loan. A small loan of $1,000 – $2,000 is perfect and you should be able to get this loan on your own at this point. If getting a small and unsecured personal loan in your own name is a problem with your own bank, then either look around at a few other institutions such as a local credit union where you may have to become a member, or ask your personal banker if it might be possible to get a small personal loan if you can bring in a co-signer to help you obtain this unsecured personal loan.
Get the money from the loan and deposit the funds in your bank account without using them. Make your payments on time and without fail for twelve consecutive months. After month twelve has passed and you have faithfully made your loan payments back to the bank you can pay this loan back in full since you are on the fast track to a high credit score after making good on this unsecured personal loan.
Continue to use the secured credit card on a monthly basis following your first-year success and pay the balance in full and on time each month. Using the secured credit card each month and making payments on the unsecured personal loan shows that you can handle progressively higher amounts of credit which will positively affect your credit score.
How Many Credit Cards Should I have when Establishing My Credit?
If you are establishing your credit for the first time and you were added to a parent’s credit card back in the first year of our credit building plan, then you need one more credit line, (or trade line as lenders call them) since mortgage lenders like to see four major trade lines on a borrowers credit report. If getting added to a parent’s credit account was not an option, then you need two more trade lines.
An easy type of credit card to get for those with thin credit histories has always been a store credit card. These store credit cards have generous credit granting policies for most who apply and they will typically grant a card to those even with the thinnest of credit histories. We recommend getting any one of the following cards – Target, Wal Mart, Kohl’s, Home Depot, or Lowes. Use it sparingly and only to build your credit. Specifically, use this card each month and charge no more than $50 to $100 online or in the store if you visit. Pay the balance in full at the end of the month.
For those who were not able to be added to a parents credit card back in year one, you still need a fourth trade line to solidify your credit profile. Apply for a second department store credit card from a different retailer. Follow the same usage rules and use these cards sparingly and only as needed. Remember, you only have them to build or re-establish your credit.
If you follow this credit building plan we can almost say with certainty that your credit score will be in the upper tier of credit scores and you will be well prepared to visit your mortgage lender to get pre-qualified to purchase a home.
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