Credit for Beginners

July 30, 2020

As we wind down graduation season, we get questions from young adults on how to establish credit. It’s always a good idea to meet with a housing counselor. Our housing and financial counseling team at GLCU is available to help you go through your credit profile, determine your credit scores, and create a spending plan specific to you.

Most young adults, or adults who have never obtained a loan or credit card, will be unscored on their credit report. When you are unscored, this means that your credit score will not show a rating or number from any of the three major credit bureaus: Equifax, Experian, and TransUnion. So, what is a credit score, and why do you need it? A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. Credit scores are used by potential lenders and creditors, such as banks, credit card companies, or car dealerships, as one factor when deciding whether to offer you credit, like a loan or a credit card. [1] The higher the credit score, the more favorable the terms will be when you apply for a loan.

Your next question may be, "If I'm unscored, then how am I supposed to get a credit card and build my credit?" In this article, we are going to explore three options that you can use. The first option is a student credit card. Mostly geared toward college students, this is a significant first step in establishing a good credit history. Building good credit might not seem like a priority when you're still in school, but you'll need it down the road if you want to finance a car, buy a house or qualify for the best credit card offers. Your credit can even affect your job prospects and your ability to rent an apartment. [2] As a college student, you can apply for student credit cards offered through a financial institution such as your local credit union. These student credit cards may accept your application even without a credit score. You can look at application requirements by visiting NerdWallet at https://www.nerdwallet.com/best/credit-cards/college-student?trk_location=ssrp&trk_query=student%20credit%20cards%20&trk_page=1&trk_position=1

Another great way to build credit is to ask a family member with established credit to add you to their account as an authorized user. As an authorized user, you receive a physical card and access to the principal cardholder’s line of credit — all without a credit check. Being an authorized user will let you make purchases and have overall card activity reported to credit bureaus without requiring you to apply for a card on your own. It’s worth noting; however, if the primary cardholder fails to make payments or spends above the credit limit, your credit will also be impacted.[3] It is essential to lay the ground rules with the primary account holder for spending and paying practices as both of your credit profiles will be impacted.

Regardless whether you have a low score or limited to no credit, a secured card can be a great way to start fresh and build or repair your credit score. Secured credit cards require a cash deposit that serves as collateral if you miss a payment or default on the loan. If you can, find a card that doesn't charge an annual fee. And make sure the credit card company reports to all three major credit bureaus, which can help you build or rebuild credit with responsible use. [4] Many companies, banks, and credit unions offer secured credit cards such as Great Lakes Credit Union. Keep in mind that most secured credit cards will request a minimum deposit of at least $200. Make sure to use it at least once a month to show regular activity in your account, but don't max out the card. Use it for smaller purchases that keep you well below your credit limit. [5] Your financial institution may also give you the option to convert your secured credit to a regular credit card if you continue to make your payments on time.

Establishing credit shouldn’t be a daunting or overwhelming process. Remember to pay your card on time and keep your card balance at less than 30% of your credit limit. In time you will see your credit scores increase, which will put you on the road to having great credit!

[1] “What Is a Credit Score?” Equifax, www.equifax.com/personal/education/credit/score/what-is-a-credit-score/.

[2] “What Is a Credit Score?” Equifax, www.equifax.com/personal/education/credit/score/what-is-a-credit-score/.

[3] “Best College Student Credit Cards of June 2020.” NerdWallet, 18 June 2020, www.nerdwallet.com/best/credit-cards/college-student?trk_location=ssrp&trk_query=student%2Bcredit%2Bcards%2B&trk_page=1&trk_position=1.

[4] Staff, Bankrate. “How To Build Credit Without A Credit Card.” Bankrate, Bankrate.com, 1 Apr. 2020, www.bankrate.com/finance/credit-cards/how-to-build-credit-without-credit-card/.

[5] Devaney, Tim. “How to Build Credit From Scratch.” Credit Karma, 26 Apr. 2020, www.creditkarma.com/advice/i/how-to-build-credit-from-scratch.

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