Top 5 Ways to Establish Credit for Young Adults

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The world of credit is a funny one—you can’t get credit until you show lenders you can be responsible with money, but you can’t show them that until you are granted credit. There are ways to get out from this crazy merry-go-round. You just need to know what they are.

5 Don’t Max Out Your Card

The second most important factor of your credit score is how much you owe. If you max out your credit card, lenders likely will wonder whether you can take on more debt. How much you owe accounts for 30 percent of your credit score. FICO doesn’t reveal to folks how much of their credit they should not use to get the highest score, so a good rule of thumb is to use the smallest percentage of your available credit you can. Many financial advisers, including Bill Hardekopf, of LowCards.com, recommend you use only about 33 percent of your available credit.

4 Pay Bills on Time

Once you get a loan or some sort of credit card in your name, you have to pay each bill on time. If not, you’ll have bad credit, which is worse than having no credit. Your credit score is determined by five factors, but the most important one is payment history. It makes up 35 percent of your score and is the first item lenders look at on your report before deciding whether to lend to you or not, according to FICO, the company that calculates credit scores.

3 Get a Secured Credit Card

A secured credit card works like a prepaid cellphone. You give the company money, say $500, and that becomes your credit limit. Well, almost. There are processing fees and an annual fee for the card that are sometimes deducted from your deposit. The annual fees and the usually high interest rate you pay make the secured card not a card you want to keep long term. After you show you can be responsible with credit, the secured card company might raise your limit, however, without you needing to deposit more money to get it. And, after you’ve paid responsibly for about a year, you likely will be approved for an unsecured credit card that has no annual fee and a lower interest rate. Make sure the secured card company reports to the credit bureaus.

2 Get a Gas or Store Card

It’s usually easier to qualify for a gas card or a store credit card than for a major credit card. The credit limit is usually low on gas and store cards, and the interest rate is typically high, which is the reason those cards are easier to get. Once you get the card, use it responsibly. You’re making a first impression to lenders, so make it a good one. Spend only what you can afford to pay back at the end of each month, and always make your payments on time.

1 Ask Your Parents to Cosign a Loan

If you applied for a loan and were turned down, you might be able to get it if you have a cosigner. The cosigner for young adults is typically a parent with good credit who takes responsibility for the loan if you miss payments. Using a cosigner is like riding a bicycle using training wheels. You are riding the bike, but you have protection from falling. The fastest way to establish credit using a cosigner is to always make the payments on time. If you miss payments thinking it’s no big deal because your cosigner picks up the slack, you have just damaged your and your cosigner’s credit by having a late payment on your record. And, you might have strained your relationship with the cosigner to boot.

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