How to Build Credit When You Have None – Why it is Important to Build Credit?

Credit is vital in today’s society. A person cannot buy a house, a car, a townhouse or other items without credit. However, with debt being so rampant among young people, how can a young adult build a credit history, and do so responsibly?

First, the adult needs a steady job. Credit is always easier to come by when the person is working. One good way to start building credit is to buy something small on credit and pay it back. This might be a good time for a person to buy something that will help him or her present a more professional appearance, such as a nice dress watch. Local jewelers will often set up a credit account for young customers, and this may be a good time to buy that nicer watch, or a class ring. The amount should be under $200, so there will not be a strain to pay the item off. Paying off an item of jewelry like this will help establish a line of credit as a reference.

A second way to build credit is to take out a small loan ($500) from the bank, let it sit in a savings account, and then pay it back. This works best when the person has had an account with the bank, and preferably, his parents as well. Allowing the loan principal to sit in an account reduces the temptation to spend it, so the loan is paid off, on time.

Many banks also offer credit cards to their customers. These cards usually have low credit limits ($1,500 or below), so the cardholder is not as likely to run into trouble. A person can build credit with one of these cards, buying small things, and paying them off at the end of the month. A credit card will also allow a person to rent a car, pay for a hotel room, and these also count as purchases, so carrying a small balance and paying it off each month builds solid credit for a young adult.

Store charge cards are also usually easily obtained, particularly if a parent co-signs for the card. Again, a person can buy items on the card and pay off the balance every month. These cards usually have lower limits as well.

An automobile purchase can build great credit. Most finance companies and/or banks will allow a young person to buy a car if a parent co-signs the loan. However, the buyer must do some budgeting and figure out if he will be able to keep up the payments for the life of the loan. This is critical since, if the parent co-signs, the parent agrees to be responsible for the loan if the buyer defaults. The car need not be a new one—a used one will be sufficient, and will not put such a heavy debt burden on the buyer. Paying off the car early, if this is possible, will also help build a solid credit rating.

The most important thing a young person needs to remember about building credit is to start small. A person (young or old, for that matter) should not take on more debt than he can afford. The lure and trap of charge cards is that the monthly payments are usually low, and it is a great temptation to keep making those small payments, but always charging more on the card, never paying the balance down by much. Debt piles up quickly, and a young adult can find himself overwhelmed with debt if he doesn’t keep careful track of how much he is spending in credit card payments.

While credit is a necessary part of life, a young adult should respect the dangers it poses, and should strive to live as close to debt-free as possible.