Knowing how to build credit is something we could all benefit from. Building credit may seem like an impossible task, especially for first timers. Getting a credit card with no credit history is as difficult as trying to figure out which came first, the chicken or the egg? This is because you cannot get a history, unless you first have a history. This is quite confusing.
Nowadays, financial institutions have raised their credit standards to discourage those who giving credit to would do more harm than good. This is especially true for young adults who may have little or no experience with handling their own money, thus are considered un-creditworthy.
Access to credit for young adults
As we had mentioned previously, getting credit for young people is difficult, mainly due to the strict regulations passed under the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009.
Gone are the days when credit card companies would set up booths in college premises and offer promotional items, offering credit cards for college students with no credit history whatsoever. For those under the age of 21, you will have to show proof of sufficient income or assets to be entitled to a credit card.
Building credit for those under 21 years
There are two possible options for those under the age of 21. Co-signing is a responsible way for a young person to get a credit card. You will require to get a card but under the supervision of someone who is over the minimum legal age and for whatever expenses you require to use the card, your co-signer will have to sign along with you. You could also become an authorized user on one of your parents’ existing credit cards.
The challenge with this system is that the activities on the card appear on both cosigners’ credit records. If you get a co-signer who maxes out his card, makes late payments or even defaults in making payments, both your credit records will be damaged. Sign up for the online access and payment alerts to enable you track the credit card’s activity.
Building credit for those over 21 years
For those over the minimal age limit, it is important to begin with credit that is easier to access. These come in the form of:
- Secured credit cards
- Gas station cards
- Retail store cards
- Subprime credit cards
1. How to use a secured credit card to build credit
The main requirement of this card is that you deposit a certain amount of money in exchange for credit. You will not be able to make purchases over the amount you have placed as the deposit and will be entitled to a full deposit refund when you finally close your account.
For those who try to abuse this card, any expenses are deducted from your existing deposit. Find a secured card that has no monthly fees and more importantly, reports your payment history to credit reference bureaus. This will help improve your credit score. Find a list of secured credit cards on CreditCards.com.
By the way, this is the exact way I built my credit. As you can imagine, when I first arrived in the U.S. as a refugee in September of 2002, I didn’t have any credit history. Of course, it took me a few years to even learn about credit and what credit score is, and all the rest (Back in Iran we do not have a credit system).
But once I figured the whole thing out, I got a secured credit card from OrchardBank. I started using it here and there, making sure I paid my payment on time every time. After 12 months of doing that, they gave me my initial $200 deposit back, and sent me a real card with a $500 limit. I am still using that card, and every 2 years or so, without me asking for it, they raise the limit.
That card helped to build my credit history and raised my score little by little. That’s why I always tell others with no credit history that using secured credit cards is great for building, as well as fixing your credit.
2. How to use a gas station card to build credit
When used wisely, a gas station card is a good tool to build your credit history on. It carries a high interest rate; therefore make payments in full before the monthly deadline set for repayment.
A gas card offers a low credit limit, and those that require monthly repayments and do not carry over your balance to the next month also do not report your payment history. Therefore, find a gas card with a revolving account as it is the one that will assist in building your credit record. Cards offered by ExxonMobil and BP are good examples.
3. How to use a retail store card to build credit
These are a good option for building up a credit history. The downside for this card is its high interest rate. To maximize on this card, get a card at a store that you already frequent and shop from. Do not make extravagant purchases and pay off all your balances in full before their due date. These cards are important in other ways.
4. How to use a subprime credit card to build credit
Subprime credit cards are real credit cards with extremely high interest rates of up to 30%, low credit limits and extra fees. They are only useful for those in need of a short credit history of up to 6 months. Be very careful when using the subprime cards so that you avoid accumulating debt at a high interest rate.
The trick to successfully utilizing these cards to build your credit history is to make small purchases that you can easily afford to pay off in full at the end of each month. You will be able to avoid the high interest charges and penalties by being extra-vigilant with them and prove that you can manage your credit.
You will slowly be able to establish your credit, and before long, find that your credit score has grown to the extent that you become eligible for the “real” credit cards at a much more reasonable rate.