When you are a young adult, it may seem like the whole world is at your feet. The possibilities are endless; college, technical school, military, travel, work, etc. However, this is the time that many young people get caught in some of life’s vicious cycles. You apply for jobs but can’t get hired due to lack of experience. And you can’t get experience because no one will hire you. It’s a similar story when applying for a loan. You apply for credit but can’t get approved because you don’t have a credit score. And you can’t build a credit score without credit experience. It can be a very stressful time and many young adults just don’t know where to turn for help.
Here are a few suggestions to help build a credit score and establish healthy credit habits.
When applying for credit with little credit experience or no credit score, ask a parent or trusted family member to be a cosigner on your loan application. If you ask someone to cosign a credit card or loan application with you, they are basically becoming a joint owner of the loan. This means that both parties are held responsible for repayment of the loan. While having a suitable cosigner may increase your chance of getting approved, you need to make a smart decision about who you ask to co-sign for you. If they mismanage the loan it can be reflected poorly on your credit report. Also, it can be difficult to remove a cosigner from an account, as new paperwork is usually required.
Secured Credit Card
Some banks and financial service providers offer secured credit cards. What this means is that they will extend a line of credit equal to the amount of the security. For example, you may be approved for a credit card with a $300 spending limit by depositing $300 into a savings account. The $300 must remain in the savings account for the entire time you have access to the secured card. The credit card can be used to make purchases just like any other credit card and after 6 months, your activity will be reported to the credit bureaus. If you get approved for a secured card, a smart practice is to use it to make three or four purchases a month that you can easily pay off. That way you can develop a habit a paying your credit card in full each month to avoid paying interest fees as well as establish good credit.
One way to build credit is to become an authorized signer on the account (for example, a credit card) of a trusted individual. Ask a parent or other family member if you can be added as an authorized signer on a current credit card. Being an authorized signer, you have no payment responsibility but your credit score is still inked to the account, so it can help establish credit with the major credit bureaus. Keep in mind, it may take upwards of six months until activity is reported to the credit bureau and there is one small disadvantage to be aware of. Just as a good repayment history is reported to the credit bureaus, so is bad repayment history. If the primary account holder does not make their payments or has late payments, it will also reflect negatively on your credit report. You need to use caution when deciding if you want to be listed as an authorized signer on someone’s account.
Many banks offer a secured loan product that allows you to use money from a savings account, a certificate of deposit, or physical property as collateral. Providing collateral usually results in a lower interest rate on the loan. A car loan would fall into this category. But like all other types of loans, it’s important to make all your payments in full and on time, so the information can be reported to the credit bureaus positively.
Entering into the world as a young adult can be a challenging time. First Keystone Community Bank is always here to assist you, please stop by one of our branches to speak with a Loan Officer to help guide you through the credit process. You can check out our convenient locations here: https://www.fkc.bank/information/locations/. We look forward to meeting you!