Saturday, July 12th, 2014

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Build Credit so You Can Borrow

Why is life so difficult for young adults? You can’t get a job without experience, and you can’t get experience without a job. You can’t borrow without a credit history and you can’t establish a credit history without borrowing. Considering the millions of young adults who go through this same scenario every year, why do we not have a more systematic way to fix this issue?
While I can’t fix the economy I can offer a few suggestions for establishing some credit history. But be warned: You need to decide why you are establishing credit. Buying a home is a worthy cause, but establishing a credit history just to borrow money and go deeper into debt, is not

1. Borrow your own money. The only good reason to borrow your own money is to establish good credit, so don’t worry, this does make sense. This approach works if you have a savings account or otherwise have access to money (usually you will need between $1,000 and $5,000, depending on your bank). You can get a secured loan through most credit unions where they lend you an amount equal to whatever you have in your account. You can’t get to the money in your account since you are using it as collateral. Then you pay it back monthly. You will lose money in interest this way, but consider it a fee to establish some credit history.

2. Pay back your student loans on time. If you have student loans (the kind that are in your name) then once you start your repayment period, you are establishing a credit history. Of course missing or late payments will result in a poor credit history, but on-time payments will establish you as a reliable borrower. Choose electronic payments to make sure you don’t forget to pay.

3. Take out a personal loan. Most credit unions will extend a small personal loan to most individuals who have a job. You may have to borrow as little as $500 or $1,000 for one year (check with your credit union). This is similar to #1 above, but it is an unsecured loan, which may be a little more effective (depending on how much you borrow).

4. Get a co-signer, carefully. I normally recommend NOT using a co-signer because it gets messy, but in this case, since you are not actually borrowing to buy anything, then get a co-signer (such as your parents). Give them the money you borrowed. Now you can make the payments, but your parents are not at risk if you fail to pay them back, since they have your money. To make it easier on you, have them disperse your monthly payment to you out of the borrowed money.

There are many ways to establish a credit history but the ones listed above are easy and very low risk. Low risks are good—they let you keep your apartment and eat at the same time.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them.

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