How to Start Building Credit

Credit is a necessarily evil. No one like to think about credit as it is almost always a hassle. But you have to have good credit in order to get access to financing.

There are several ways that you can start building credit. These include getting a secured credit card, getting a CD secured loan, or getting a small auto loan with a cosigner.

Secured Credit cards

Most people are afraid of credit cards, and for good reason. If used incorrectly credit cards can be an easy way to get in a ton of high interest debt. But, they are also a great tool to build you credit if you can control your spending. Generally when you are first applying for credit you will have to apply for a secured credit card. The creditor will require you to put up a deposit, which is used as your collateral and your credit limit. This will generally be $200. You will need to show that you can handle the credit card for around six months before your credit card turns into a traditional unsecured credit card. The creditor will also at this point raise your credit limit assuming you have handled the card well. If you feel like you can handle the increased limit, there is nothing wrong with having a higher limit.

CD Secured Loan

An alternative to a secured credit card is a CD (certificate of deposit) secured loan. If you go to your local bank, they will be able to set this loan up for you. Generally the bank will give you a 12 month loan against a $1000 CD. Depending on the bank they may require you to set up the initial deposit on the CD which is usually $1000, or they will use the loan to fund the CD. If the bank funds the CD deposit, you will make roughly 12 payments of $95. At the end of the 12 months you can cash the CD out for $1000 plus a few dollars of interest. Usually there is a loan fee and a small interest rate associated with the CD loan, but it’s a small price to pay for the sake of building credit.

Using a Cosignor

Assuming you do not have time for the 2 above options, you will need a cosigner with strong credit in order to get a loan. The lender will base the loan off of the cosigners credit, but you will still be on the note. As you make the payments on time, you will start building your credit history and a relationship with the lender.

Credit is a huge factor in financing. Without it, you are at the mercy of being able to get a cosigner. But, credit does take time to build. Generally to qualify for a loan by yourself you will need a minimum of 2 credit references with at least 12 months of payment history. Some lenders require 3-4 references.