Building Credit from the Ground Up

Turned down for credit cards in the past, or scared that you will be? This post is for you.
Turned down for credit cards in the past, or scared that you will be? This post is for you.

A friend of mine asked me for some advice the other day. She admitted to me that she hadn’t ever had a credit card, but was starting to think it might be a good idea to start building her score. She is certainly not alone! A whopping 63% of millenials have never had a credit card (read more). She, like many others, has always felt she gets along just fine without one. She also mentioned to me concerns that using credit cards would make her more cavalier with her spending, citing recent studies like this one. While these were very valid considerations, equally valid are the advantages of building a good credit score. My friend decided that at this point in her life, it might be good to start building her score to prepare for her future. However, having been rejected for the first card she applied for through her banker, she wasn’t sure how to proceed. Read more to find out the strategy I laid out to help my friend get started in the world of credit, despite her lack of previous cards and existing student loan debt. Because a big factor in your credit score is your credit history, people who are getting a credit card for the first time might find it hard to get their foot in the door. My friend’s situation was additionally complicated by her student loans which are something that burdens nearly everyone in our generation. When you have a lot of debt already, companies are nervous to give you a line of credit that will allow you to take out even more debt. This is called having a high debt-to-income ratio, and it can make your life a little more difficult.

How to Keep Student Loans from Making Life Harder

Here I will outline a few strategies on how to handle student loans that might make the task of applying for new credit easier.

  1. Pay them off! If your loans are small enough that, by really scrimping and saving for a year or so, you can get rid of them, do it! If your loans are way too massive to do that, keep reading…
  2. Ensure you always make your payments on time and in full. A lack of positive, long-term credit history is hard to avoid in your early years of being a borrower, but bad marks on your credit will haunt you for years and make things really difficult.
  3. Consider extending the term of your loans. Get in contact with your lender and see if they will allow you to extend the repayment term for your loan by 5 or 10 years. This will lower your monthly payment. While you can always throw MORE money than required at your loans (and in most cases, you should do this so that you can pay them off quickly), reducing the required amount each month will make you a more favorable candidate for things like credit cards due to a lowered monthly debt-to-income ratio.
  4. Along these same lines, consider income based repayment. If your income isn’t very high and you have a lot of debt, many loans (especially those backed by the federal government) will allow you to do income-based repayment, a strategy which will lower your payments proportionate to your income. To find out more about this and other strategies, see here.

Getting Your First Credit Card

Getting your first credit card can be tough, whether or not you have student loans. Here are some strategies to get you started.

  1. If you’re still in college, or sometimes even if you’re not (call the companies and ask if they allow recent grads to apply, the answer might surprise you), a student card is the way to go. These cards are designed for people who haven’t had a long time to build a credit history yet. Check out Nerdwallet’s page about these cards. You’ll probably get a pretty low credit limit, but at least you’ll have your start!
  2. Pull your credit report, or have a look at credit tracking services like CreditKarma to make sure there are no negative marks on your credit. If there are, fix them!
  3. If the student cards fail you, try going to a bank you already have a good relationship with (i.e. where you already have a checking or savings account) and having them help you get a card. Stress that you have very little credit history and just want a “starter card”. Ensure that the card does NOT have an annual fee. You’re probably looking at a card which does not have much in the way of cash back rewards. At this stage, I’d actually be a little wary of high-reward cards, because those require better scores and might get you rejected again.
  4. If all else fails, apply for a secured card. This is a credit card where you put some money down up front. They are very low risk for the bank, since for the most part you’re using your own money, so there’s a very low chance of getting rejected.
  5. If you happen to have an adult you TRUST (usually a parent) that has a GOOD CREDIT HISTORY (this is mandatory, or it will hurt you not help you!), ask them if they would consider making you a joint account holder (this one is better for your score because YOU are liable for the payments along with the other joint user) or authorized user (this tends to help your score a little less, since you’re not liable for the payments in this scenario) on one of their existing cards. Try to add yourself to their oldest card with a clean history of on-time payments if you can, since that will give you the biggest “boost”.

I hope that helps some of you get started on your journey to responsible credit use! If you’ve just gotten your first card, be sure to read over my Introduction to Your Credit to make sure you handle it well and set yourself up for a bright future. Do you have any tips or tricks for getting your first credit card? Share them in the comments below.

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