A 20-year-old weighs a loan versus a credit card for new computer purchase
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Dear Opening Credits,
I am 20 years old next month and had an auto loan with my credit union co-signed by my dad, which I have paid off easily. I want to buy a computer. I tried getting a loan from my credit union for $1,000. I can handle payments up to $80 a month. I’m thinking about a credit card. What should I do? — Nicholas
First, be grateful to your father. What a guy! He linked his established credit rating to your unproven one, and you definitely benefitted from the deal. Without his help, I doubt you could have borrowed for the car by yourself. Even credit unions, which are known for being more accessible to their members, tend to shy away from lending large sums to young people who haven’t yet demonstrated financial responsibility.
Here’s why you came out ahead.The credit union sent information about that car loan to the credit reporting agencies — TransUnion, Equifax and Experian — as soon as they granted it. The timely payments and declining balance were then added to your credit reports, giving credit scores something to calculate. FICO is the most common of these scores, and it ranks your payment history and your debt compared to your credit limits (called credit utilization) as primary factors. Length of credit history, types of credit in use and pursuit of new credit comprise the remaining scoring categories.
What do your scores mean to you and that computer you’re hoping to buy? Borrowing options. That one account might have increased your credit rating enough to be appealing to credit issuers. To know, first pull your reports. Each is available for free once a year from annualcreditreport.com.
Presuming your reports show evidence of a perfect payment history and a satisfied loan, your scores should be decent. FICO scores start at 300, which is considered very high risk, and go all the way up to 850. Scores over 750 are an indication that you’ve had a long and excellent relationship with credit products. As the past is predictive of the future, high numbers translate into better borrowing opportunities.
Before applying for anything, though, you’ll need exact numbers. You can buy them from myFICO.com for about $20 per credit bureau. Since you were turned down for the credit union’s personal loan, though, your scores might not be quite up there. So here are your options:
- Ask dad if he’s willing to co-sign on another loan. Make it short term. A $1,000, one-year loan with a 12 percent interest rate should have payments of around $89, and the finance charges would be just $68 in total. Since it’s more than you can currently afford, a two-year loan may be possible, and as long as you pay $80 every month, you’ll be debt free many months early.
- Get a credit card. Because of your age, you’ll need more than good scores to get your own. An income is essential. Applicants under 21 need to either have a creditworthy co-signer or prove they can meet the payments. The more you make, the greater the chances you’ll have of qualifying for a card with a credit limit sufficient to absorb the full cost of the computer. A well-paying job plus a good credit score can make you eligible for an account without dad’s assistance. Student credit cards may be a good place to start as the issuers are open to new customers and typically offer smaller credit lines in return for the risk.
But wait! Remember that credit utilization is a major factor in FICO scores? If you charge the entire purchase price and hit your credit limit, your score will decline, which you don’t want. For this reason, save as much money as you can or sell something you don’t need. Then immediately apply those funds to the account and drive it down with the regular payments.
If the computer is $1,000 and if you can scrape together $300, you’ll owe $700. If the card has an APR of 21 percent, for example, and you send $80 religiously every month, in 10 months you’ll be in the black for only $67 in interest. Just as wonderful: Your score will improve with the positive activity. With it you can impress not just lenders, but the man who gave you a great start.