At a young age, one of the most overlooked topics is credit. Most people in their 20s do not understand credit, nor think it is of any importance. Regardless of age, right now is the best time to start establishing your credit.
People with little or no credit history, have a very hard time obtaining any type of loan, whether it be credit cards, auto loans, or even mortgages. Lenders will not give an unsecured loan to anyone without proof of a good history on payments.
Credit cards and Small loans are two great options to begin establishing your credit. Without a good history of credit, you will almost never be able to obtain a huge loan or a high credit limit unless you can prove you can repay the lender, usually done by income verification. Even with verified income, lenders usually charge high-interest rates to people without a good credit score.
Small loans and credit cards will help you establish credit quickly. Once you can show lenders that you can responsibly pay back debt, you will be more open to larger loans and higher limits on your cards.
Credit cards may be the best way to jump-start your credit history because they are revolving credit. When you have a credit limit of $300, you can use all or little of it at any time as long as it is available. There are many “starter” credit cards that are available for people with little to no credit. Another option if this is not in your range, are secured credit cards.
Secured cards are available to nearly anyone who can come up with a minimum amount for a deposit, which is used as collateral. Many cards are available for limits as little as $200! If you found yourself in a position where you cannot pay back the balance on your cards and you have reached your limit, banks will end up keeping the collateral to pay the debt. Although, if you can maintain a good record and pay the debt back, after a period of time (usually 1 year) banks will usually release the deposit back to you.
You want to make sure you are actively trying to build your credit. Once you receive that small loan or credit card, you need to make sure you are creating a trail of good payments so that future lenders can see how responsible and trustworthy you are. Also, be aware of not staying over 50% of the limit on your credit line. Credit reports do not show individual transactions, though they do show if you have used your credit during the month. So it is good to make sure you use your card at least once a month.
After significant months of making on-time payments to your small loan or
credit cards, you should have enough of a history to be able to improve your
creditworthiness. So other credit opportunities can become available to you.
As your score increases, you will be put into positions to receive credit cards
with perks such as Travel rewards, Cashback Savings, Lower Rates etc.
To recap it’s never too early or too late to improve your credit. Remember it is
a process that rewards you after time. During that time use your credit
wisely pay all bills on time and don’t open too many credit accounts. Your
conscious efforts will be rewarded with good credit.