For young people just starting out, getting good credit often seems like a Catch-22 – you have to have good credit to get credit, and you need to get credit to establish good credit. While having a blank credit history does limit the types of credit you can reasonably expect to obtain initially, there are some simple ways to establish positive credit that almost anyone can employ.
Bank Accounts
An account at a bank or credit union is a good first step to establishing credit, if you handle the account responsibly. Overdrafts and bounced checks not only cost you money, they can cost you the ability to apply for credit down the line. However, a checking account in good standing can save you hundreds of dollars when compared to the fees charged by most check-cashing businesses.
When shopping for a bank or credit union, try to choose one that has few or no maintenance fees, and make sure that you will have an ATM available to check your balance or make withdrawals for free, as high ATM fees can wreak havoc on your budget. Take advantage of online bill-pay if your bank offers it for free – it’s a quick and low-hassle solution for keeping track of your expenses from month-to-month that will help you stay on top of your credit scores.
Secured Credit Cards
If you don’t qualify for an unsecured card with reasonable rates, a secured credit card is a great way to start out. Some banks or credit unions will place your deposit in a money market account or another interest-bearing account, which means that if you only charge what you can pay off each month, you can actually make money by using this method.
You want to avoid any card that charges high annual fees, or that has any other hidden costs. Additionally, you need to make purchases that you can pay off in full at the end of the month, without using more than 30% of the credit card’s available balance. Make sure you have the discipline to stick within your spending limits before you get the card – how you manage your bank account is a good indicator. If you can stay within the available funds in your bank account without going over, and actually have money left at the end of each month, you can probably handle your credit card with equal responsibility.
Shift a regular purchase such as gas, groceries, or a specific utility to the credit card, and use your budgeted funds to pay it off. This will prevent you from misusing the card by buying things you don’t need in the name of building your credit.
Student Loans
While taking out unnecessary student loans is ill-advised, a necessary student loan can be a real boost to your credit score. Generally seen as a type of ‘good’ debt, most banks and lenders look favorably upon student loan debt as long as you make payments on time, or have a qualified deferment or forbearance in place. Another benefit: the interest you pay on your loan is tax deductible – so you can claim it at the end of the year on your taxes.
Because there are so many payment options available for student loans, chances are good that you can find one that will fit your budget. If you start paying before you graduate, you have the added bonus of building up a solid repayment history that can assist you in obtaining additional credit after your graduation.
While no one action can guarantee good credit in the future, by making sure you establish your credit in a responsible and diverse way from the start, you can avoid the temptation to overspend on credit cards and instead focus on building a responsible financial plan that will both improve your credit scores and your financial outlook going forward.