Establishing Your Credit

Establish your creditAs a teenager and young adult, we learn that credit is very important in the United States. You need credit for everything! The reality is that while everyone requires you to have some sort of credit, getting started is quite difficult! Some people may recommend that you apply for a store credit card. Some store credit cards are easy to get as the stores want you to spend money there.

The problem with store credit cards is that if you’re using it to establish your credit, you’re creating a lot of debt for yourself in a store that you may not purchase that much in. The idea behind credit is to prove that you’re able to make payments. Getting a store credit card and racking up a whopping $50 balance is not going to show anything.

There is a couple other ways to establish credit if you have none. One would be that clunker that you paid $500 for out in the driveway. Some banks or credit union will allow you to do a SMALL secured loan, using that car as collateral. If your car bluebooks at $750, take out $500. A second way is to save up some money and purchase a CD (Certificate of deposit). Depending on the bank, there are different minimums. The easiest way is to find a bank or credit union that has a $500 CD. Once you’ve taken out this $500 CD, request to take a loan out against it. You’ll get approved for this loan guaranteed as you’re not really borrowing from the bank, you’re borrowing against your own money! The bank has no risk at all since they’re holding the CD. In this case, your payments would be around $45.

Once you’ve gotten this loan, you can do whatever you want with the money. You can spend it, or you can save it. One smart idea is to take this money, stick it into a account, and set up a automatic payment with the loan that you just took out. You may have to contribute a few bucks of your own as the bank does charge a little interest, but this shouldn’t be more than $10-15 at most on such a small amount. By doing this, you don’t have to worry about making the payments, and your credit will show as perfect as all payments will be on time. You also won’t have to worry about having the money to pay the payment when the time comes each month.

If you go the route of the CD, another option is to get a $600 CD, take out a $500 loan on it, take the cash and purchase another CD. You’ll have to come up with the funds to make the payments, but at the end of the CD term (once the loan is paid off), you’ll have $1,100! It’s a interesting way of saving. The bank pays you interest on the CD. The downside to having a CD is that it locks the money away for a period of time. For first time credit establishing, getting a 6 month or a 1 year CD is best.

This route also works for those with bruised credit! One individual had a credit score of 510, and 4 things in collections, and one judgment. He had a CD for a year, made the payments, and somehow his credit score was raised to 620 after a year. He still had the same collection accounts and judgments although it’s unknown how it got that high with that many derogatory accounts.

Once you’ve established your credit, it’s very important to keep it good. Don’t overextend yourself, it’s very easy to do. The best thing you can do is avoid high limit credit cards! Keep it within reach. If you must use a credit card, get the best deal possible. Don’t ever choose a credit card that requires a “application fee”.

Good luck and remember, take care of your credit. It’s the best thing you could ever do.