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Getting Started Establishing Credit

If you’re 18 to 21 or so and want to establish credit, there are a couple of things you need to think through first. Once you do establish some credit, how sure are you that you can pay it off each month without fail? Just hope and optimism aren’t enough, and nothing kills your credit rating more than going past due even just once.

Yes, building up credit can cost you some fees and interest. If you’re smart about it, paying some of these is probably a worthwhile investment in building a solid credit foundation. There are five common ways to get started. All of them are based on the assumption that you’re employed, have sufficient income, and have no previous credit problems:

Joint Visa or MasterCard. If you can get your parents to apply for a joint card with you, you’ll be able to use their good credit rating to get one with a decent limit. If your parents read this, the advice would be to never actually give you the card – period. It’s meant to establish credit and not to give you permission to spend. The card reports to the credit bureau and starts a great track record for you, but it should stay in your parent’s possession and only get used twice a year for $20 or so, just to keep it active.

Secured Visa or MasterCard. Secured simply means a cash deposit in the amount of your credit limit is placed on deposit as collateral. Other than this deposit, the card looks and charges exactly the same as unsecured cards, and also comes with the usual late and over limit fees like all others. The deposit stays in place until the credit card is closed or changed to a regular account. It’s an excellent start and doesn’t need a cosigner. You want to confirm that the fine print states that they’ll switch you to a regular card after 18-24 months of on-time payments.

Department store cards. You’ll generally be approved without previous credit for a very modest limit of around $250 or so. It’s not much, but it’s an excellent start. Who knows? It may get you 10% off the day you apply, just make sure it’s one of the last times you actually use the card! Huge rates and a tiny limit means you’ll want the credit rating and not use the card.

Co-signed loan. This is the most common first loan for younger people. The co-signer, usually a parent, is equally responsible for the repayment as you are. It’s the reason lenders almost always want a family member. If your parents are looking for advice, it would be to never co-sign anything for anyone. That isn’t a double standard – it just depends on who is asking for feedback. Often a smaller loan, or an increased down payment, can eliminate your need for a co-signer.

Car loan. Assuming it’s a reasonably priced used vehicle, a 30 to 50% down payment through a reputable dealer may get you financing without a co-signer. A family member is better protected by giving you a portion of the down payment instead of signing on the entire loan with you. But car loans are still the most common way most young adults establish credit. You just need to assure it requires the world’s smallest payment and that you know the price of your insurance up front.

Just be really clear that you’re wanting to establish credit and NOT establish debt! There’s a big difference and not realizing that will be very very expensive. Be careful out there.