As a credit union employee, I get asked all the time what the best way to start building credit is. My two favorite options are share-secured loans and credit cards.
Share-secured loans are wonderful to start out with because you’re borrowing your own money! You put up a little money into your savings account and you pay it back with a really low interest rate. Our interest rate for these types of loans is the highest tier share rate + 2%. This means that whatever interest rate the highest tier share earns, you add that to the 2% (ex: right now, our highest tier share savings, aka our savings account, earns 0.10%. Your share-secured loan interest rate would be 2.10%). What’s even better is you won’t have to have a co-signer even if it’s your very first loan! We don’t even run your credit report for these because it’s your money. It’s on hold in your account, so it’s not really a big risk for us. With this type of loan being used for the sole purpose of building your credit, I would make the minimum payment due, not pay it all off in one big chunk. You want to build a good long repayment history.
As for the credit card idea, don’t freak out! Credit cards can be awesome things if they’re used responsibly. First you want to make sure that you find a credit card that has a low fixed interest rate with no annual fee (by the way, I think ours is pretty great). Also, make sure that you get a low credit limit to start with. You may need a co-signer with this type of loan because it is more of a risk. I’m going to share a piece of advice with you that my dad shared with me on my first credit card: make a small purchase on your credit card each month (like a tank of gas) and pay it off as soon as your statement comes. If you follow this sage advice, you won’t have to pay interest on the card and your debt won’t spiral out of control.
Whichever option you choose, just make sure you pay the full amount due and make it on time. Follow this simple advice and you’ll be a credit super star in no time!