2 ways to start building a credit history
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear To Her Credit,
I am 19 years old and
want to establish credit. How can I do this with no credit history? -- Kristopher
Your question is one that gets asked often,
which makes sense because millions of young adults are in your
precise position. You want a credit card so you can charge things, but how can you
persuade a bank to offer you one if you've never done it before? The Credit CARD Act of 2009
made it far more difficult for people under the age of 21 to do
so too, but it can be done. Here are a couple of viable options:
Method No. 1: Glom onto your parents. If your mom, dad or other trusted loved one is willing to
help, you may be able to piggyback on their established credit. That person can
co-sign on a new credit card account with you or add you to one they already
have as an authorized user. Both designations will result in you being given a
credit card with your name on it, and a credit history of your own will soon
I always hesitate before advocating
such jointly held accounts, but they can work out as long as all cardholders
are aware of the potential problems and take pains to avoid them. For example,
if someone co-signs, then you are equal partners. So while you might be the
only one charging and paying, the issuer has the right to take legal action
against either or both of you in the event the account goes delinquent. Credit
damage will show up on all cardholders' reports as well.
And if you're an authorized user, you
can charge with impunity, but you would not have the same legal responsibility
to pay and the issuer couldn't sue you for any money due. However, the
potential for credit report damage is the same as with a co-signed card.
The advantage of shared accounts is
that if all cardholders treat them perfectly by paying on time and keeping the
balance paid off or well below the credit limit, you'll kick start a credit history of your own. After a couple of years of regular and excellent use, you'll
be able to offer proof to other lenders that you can handle a line of credit
and may be able to qualify for a great unsecured card of your very own.
Method No. 2: Apply for a secured
credit card. Think about why a credit card company
might be willing to extend a person borrowing power. It would be because, the
applicant has demonstrated that she's repaid what she charged before andalso is
earning enough money to handle the amount that she is allowed to borrow.
At this stage, you don't meet the these
requirements, but if you have a job, a credit card company may agree to issue
you a secured credit card that's guaranteed by cash that you put down as collateral. If
approved, they'll hold your money in a special account and offer you a line of
credit that is close to that sum. If you default, the company will be able to
claim the funds rather than having to sue you for the debt as they would with
an unsecured account.
I do like secured cards because they
allow people like you the opportunity to prove yourself without putting anyone
else at risk. Also, the spending limits are usually small, so you can't get in
over your head too badly.
Whichever type of account you start
with, treat it right from the beginning. Never forget that all activity will
wind up on your consumer credit reports and will stay there for a long time.
Most derogatory information (such as late payments) will follow you for seven
years, and positive information can stay indefinitely.
Got it? Great! Now spread this information
among your teenage friends, Kristopher.
See related: Build good credit with your first credit card
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: May 16, 2012
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