Top 5 Ways to Establish Credit for Young Adults

The world of credit is a funny one, especially for young people. Building credit for young adults is not an easy task unless they can show lenders they can be responsible with money, but they can’t show them that until they are granted credit. However, there are ways to get out from this crazy merry-go-round. You just need to know what they are.

Here 5 ways to build credit for young adults:

5. Don’t Max Out Your Card

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One of the most important factors to consider in order to build credit for young adults is how much you owe. If you max out your credit card, lenders likely will wonder whether you can take on more debt.

In order to build a strong credit line, you have to understand how the credit bureaus operate. Credit card debt is a major factor in determining your credit score.

How much you owe accounts for 30 percent of your credit score. FICO, a company that calculates credit scores, 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.

However, I’d also advise not to forgo common sense or sound financial advice purely for the prospect of building a better credit record. If you’ve developed sound financial behaviors, your credit record will reflect that.

4. Pay Bills on Time

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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.

Meanwhile, taking student loans and paying them on time is another way to establish a credit history as well as build credit for young adults.

However, delinquent student loans will drop your credit score, and it is much more difficult to rebuild your credit score when you have defaulted loans than when you have massive credit card debt.

Defaulting on your student loans can make it increasingly difficult to get other types of loans down the road, including auto loans and mortgages.

Talk to your lender about payment options if you cannot make their suggested payment (rather than skipping a payment). If you do wind up defaulting, speak to a credit counselor immediately to see what your options are to rebuild your credit.

3. Get a Secured Credit Card

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A secured credit card works like a prepaid cell phone. 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 is sometimes deducted from your deposit. The annual fees and the usually high-interest rate you pay make the secured card a card you don’t want to keep long-term.

Apart from helping to build credit for young adults,  one of the major advantages of getting a secured credit card is that it helps you stay out of trouble.

There’s always a temptation for young adults to spend beyond their means, and it’s a lot easier to do so when you have your own credit card, but this is what a secured credit card helps to prevent. The trick to building credit for young adults using this method is you’re not able to overextend yourself with large credit card balances and interest.

If you couldn’t afford the expensive vacation with the cash in your bank account, you shouldn’t be using credit to spend outside of your means.

After you show you can be responsible with credit, the secured card company might raise your limit without your 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.

Note: Make sure the secured card company reports to the credit bureaus.

2. Get a Gas or Store Card

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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

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The most straightforward way to build your credit is by taking out a credit card and paying it down each month.
Acquiring a card with reasonable interest rates, however, can be tricky when you have no previous history.

Some companies have special cards for college students, but these also have requirements many young people may not yet be able to meet. If you are younger than 21 years of age and applying for a loan, getting a cosigner might be the only way to get the loan.

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 build credit for young adults 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.