Building credit history or improving credit scores is best done with a combination of both secured loans and one or two credit cards.
You should be aware that it takes time to build good credit. There are no shortcuts, and sooner you start – the better.
How and where to apply for a loan?
The first place to apply for a loan is your local bank, where you have a checking or a saving account.
Start by asking for a small loan. $300 should be enough. If they approve you – fine. If they don’t, you have three more options:
- Ask someone (your mom or dad) to co-sign with you on the loan. Usually that should be enough to be approved.
- Ask your mom or dad to take the loan from their account, and co-sign with them. Most likely that they can get the loan without you co-signing, but you need to co-sign if you want the information to go on your credit report.
- Ask for a secured loan. Secured loans usually do not require any credit to get. Secured loans are great way to start your credit, and many people use them for that purpose.
What is a secured loan?
A secured loan is like borrowing against your own money. You open an account, say for $300. The bank then freezes the amount and gives you a loan against the same $300 they hold.
The advantage of getting a secured loan is that you don’t risk getting a rejection on your credit report that will further hurt your credit. The reason you will get the secured loan on the first attempt is because you need to put up a deposit with the bank that is equal to your credit limit. The deposit can earn you interest and in the unfortunate event you were unable to pay the loan and defaulted, the bank would use your deposit to pay the debt.
Ask to make 24 payments (each for about $10 – $20). That’s it. You’re done. Every payment you make is reported to the credit bureaus and gets on your file. When you’ve paid in full the bank un-freezes your money.
If, for some unforeseeable reason your bank will not approve you for a secured loan – go to your local credit union. They often offer pledge loans, sometimes called “share secured loans”, and you’ll probably get approved there without any problem.
What about student loans?
Naturally – if you’re planning on going to college or university and need to take student loans – these loans will certainly go on your credit report and build your credit.
After 6 months or so, when the bank sees that you’ve made on-time payments you should consider adding a starter/low-limit/student credit card to the deal. This will add to your credit diversity, add a history of on-time payments, build a good credit history and boost your score.
There are two golden for building credit history:
- NEVER be late on a payment. Always pay on time. A single late payment will do a lot more damage than what 2 years of timely payments can fix.
- Whatever loan or credit card you choose, ask in advance if and to which credit bureaus they report. If they don’t report to all 3 – choose another loan/bank/credit card.
- Don’t expect overnight results. Building or repairing credit takes time.