How to Build Good Credit From Scratch

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Building, managing, and using credit can seem like strange, unfamiliar new part of life to young people who are just beginning on a walk down the path of adulthood.

Properly understanding and responsibly utilizing credit is an essential part of financial life, but it can be a daunting task when first starting out.

With all the new responsibilities of moving out on your own for the first time, the importance of these lessons and experiences can, unfortunately, be easy to overlook.

But no matter how ignorant and inexperienced you may be, your situation is not unique.

In fact, almost everyone has dealt with this very same dilemma as a young adult, and many banks, credit card companies and lending institutions offer options specifically designed to help young people without credit to begin their credit history.

Unfortunately, there are also many predatory lenders that will eagerly take advantage of a young person who is not experienced enough to know the dangers of credit.

The keys to success in building your credit the right way are educating yourself, being smart, and using the available resources properly.

 

The Credit Paradox

Although it seems paradoxical, you have to have credit in order to build credit, and this specific area can be particularly challenging for young adults.

After all, you must have a decent credit history to get a credit card, loan or other credit lines, but how can you build credit without access to credit? If you are new to the world of credit, this may seem like a difficult and complex problem to solve.

Fortunately, you are far from the first person to struggle with this issue, and all of us have had to try and understand this strange chicken-or-the-egg scenario early on in our adult lives.

Everyone has to start somewhere, and there are options available that allow young people to begin working towards good credit, even without a credit history.

 

5 Ways to Begin

Even if you have never had a loan or a credit card, you may still have access to credit options that can help you build a good history. These are designed to help young people use and learn about credit without putting the financial institution at great risk.

  • Secured Credit Card: Whereas a traditional credit card provides an unsecured line of credit, a secured credit card must be backed up by an initial cash deposit. They still have all the other characteristics of a traditional credit card including interest rates, annual fees, due dates and reporting to credit agencies.

 

  • Secured Loan: A secured loan is like a forced savings plan that helps build credit. Functioning under the same basic principle as a secured credit card, the money that is “loaned” is actually held by the lending institution until the full loan amount is paid, at which point the funds are released.

 

  • Student Credit Card: A student credit card is essentially the same as any traditional credit card, but designed specifically for college students who are new to credit. They generally have more restrictions and lower limits than traditional cards, but also come with additional benefits for young people.

 

  • Co-signed Loan: If you cannot obtain a loan on your own, you can ask a family member or a close acquaintance to co-sign for you. You would be fully responsible for the loan– including the payments and the credit reporting– but the co-signer would be held responsible if you do not pay.

 

  • Bill Payment: If you already have bills in your name (i.e., rent, phone bill, utilities, etc.), you may be able to build credit simply by paying them. Although most will not report to credit agencies unless you become delinquent, you can request that these sources report your positive payment history to credit bureaus.

 

Credit Management

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Before you begin searching for the best credit cards or asking friends to co-sign a loan, it is important to have a basic understanding of how to manage your credit responsibly.

Irresponsible spending, poor (or absent) budgeting, lack of understanding and mismanaged credit have been the financial downfall of countless young people. But beginning your credit the right way will have countless benefits, and you will be on the right track to financial success.

But beginning your credit the right way will have countless benefits, and you will be on the right track to financial success.

But beginning your credit the right way will have countless benefits, and you will be on the right track to financial success.

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