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What’s a Good First Step in Establishing a Credit History?

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If you’re in search of a line of credit for the first time in your life, you’re probably going to have a little bit of trouble finding a lender who will grant you a loan or a credit card.

That’s because these days, many lenders are very wary of lending to consumers who have limited borrowing histories. Consequently, it will be important for you to go out and establish a healthy record of dealing with credit, and there are a few options available to you for doing so.

The first solution many young people turn to is to obtain a line of credit with a co-signer who has a good credit rating, such as their parents or another older family member. And while this might have certain benefits for you – such as the lower interest rate that comes with a strong credit score – it can create problems for your co-signer, especially if you make any missteps in dealing with your new account. That’s because they’re considered equally responsible for any debt you accrue, and any payments you miss, regardless of whether they’re using the account as well.

A better option that you might want to try out is to seek a secured credit card, which will not take your lack of a credit history into account. Instead, you will be required to give a lender a relatively small amount of money before opening the account – usually it’s a few hundred dollars – to establish the total value of your card’s credit limit, and then are free to begin borrowing.

By using these accounts responsibly, such as by keeping your balance as low as possible, making on-time payments every month and using the card sparingly, you’ll be building your credit history and score in a healthy manner. Of course, not all secured credit cards report to the three major credit bureaus, so you’ll want to make sure that yours does.

But because these accounts generally have far lower credit limits and higher interest rates than unsecured cards, you should think of your secured card as a form of credit training wheels. After six months or a year of responsible borrowing, you’ll be able to graduate to a card that offers you a better deal.

Image: xJason.Rogersx, via Flickr

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