When you turn 18 or begin your college career, signing up for a credit card with a low interest rate and no annual fee — like a VyStar Visa® credit card — is a great way to start building a strong credit history. However, it isn’t the only way.
Young people today have several different options when it comes to credit building. Not sure where to begin? Here are five ways you can get your credit off to a strong start:
Open and Maintain a Checking Account
Although the activity on a checking account is not reported to credit bureaus, opening and maintaining your own checking account is the first step in showing your financial institution that you can be responsible with your money. VyStar checking accounts are free, plus you get the choice of a debit card or ATM card at no charge. There’s also no fee for tracking your account balance online or by phone. Since you begin building credit by proving your credit worthiness, it is very important that you monitor your activity and ensure you do not overdraw your account.
Obtain Nontraditional Credit
Some lenders will also consider your payment history on items such as your auto insurance, rent or cell phone bill when deciding if they will offer you a starter credit card or small loan. Unless you default on an account, this type of payment history will also not show on your credit report unless you default on an account, but keeping up with your bills shows your financial institution that you have positive payback history.
Apply for a Savings Secured Loan or Credit Card
Most credit unions offer these types of products to help their members establish credit. A savings secured loan is an easy way to build credit, and it can also help rebuild positive credit if you have had problems in the past. This product works by securing money in your savings account and then issuing you credit on those funds. The money in your account still earns interest, but it is frozen while you are paying back your loan. After a short period of time—usually less than 12 months—you can request an unsecured loan or credit card, which will create a new trade line on your credit report. The funds in your savings account will then become available for you to use.
Co-Borrow With a Family Member
Enlisting the help of a parent or guardian is another effective way to establish credit. Borrowing jointly with someone who has strong credit will help you begin building your credit until you are able to borrow on your own. After you have made payments to this joint account for a period of time, some lenders will allow you to apply on your own based on your strong repayment history.
One important thing to remember is that if you pay a joint loan late or fail to pay altogether, it will negatively affect not only your credit, but your family member’s credit as well.
Become an Authorized User on a Parent’s Account
Some parents will opt to add their children as authorized users on a credit account, like a credit card or sometimes even a mortgage. The benefit of being an authorized user is it will provide you a credit score, though you will only show as an authorized user on this account. As lenders review your credit history, they may take that into account when deciding whether to lend to you personally. In addition, if the account holder has payment problems with this account that result in poor payment history, that may follow you as well. In general, it is strongly recommended that you build your own credit history.
Building a positive credit history takes some time, but you will be glad you started this process early. When you are eventually ready to take out a loan for a car or home, this preparation will make it much easier and make you eligible to receive lower interest rates —saving you money in the long run.