Welcome to the first installment in my ‘How to Adult’ series. Today, we are going to focus on establishing a credit score. We live in post-recession times, and a major contributor to that recession was poor risk management by major financial institutions. Basically, that means banks and other lenders were handing out loans, even to people who couldn’t afford them. Consequently, when everything went to hell, the federal government (who can’t keep their nose out of anything) increased regulations which has made it harder to get a loan. This has greatly impacted those of us who want to get started building credit, which is something the real adults have been nagging us about forever. Now that the regulations are more stringent, lenders are not handing out credit cards to the inexperienced anymore, so we will explore ways to get credit, even when you have none.
First, let’s explore what a credit score is. There are three major bureaus (which are actually publicly traded companies…yea…put that in your pipe and smoke it) creating elaborate algorithms in order to determine if a person is lendable. Equifax, TransUnion, and Experian each have their own patented equations intent on turning a person’s nature into a number, and often times there are many equations that weigh factors differently in order to meet specific needs of a lender. Just in case having countless financial institutions, and three different credit bureaus isn’t convoluted enough, now we have to come to terms with having something like…30 different scores!? But fear not; we are going to work through this together.
First to build credit: My three recommendations to get you started.
- Get a low limit student credit card from a larger institution that won’t be overly concerned about taking a potential loss. From the perspective of the financial institution you choose, you having no score means they have no way to tell if you are a person who ‘makes good’ on your obligations. In other words, lending to you comes with higher risk. This is why I recommend a larger institution who may have a higher tolerance for risk.
- If you are like me, and absolutely loath big banks, but still need to get started building credit, fear not, because this will be the option for you. Find a smaller financial institution, like your local credit union, and ask for a secured credit card. The financial institution will ask you to put down on deposit all or some of the dollar amount limit on your credit card, meaning you put $300 into an account and allow the institution to hold that money. In return, they give you a credit card with a $300 limit. The money you put down is still yours, it is merely held just in case you choose to use the credit card irresponsibly. This means less risk for the smaller financial institutions which increases the likelihood of lending to an individual without a credit score. An excellent option to start building a credit score for those of us without a co-signer.
- Although this is by no means the last option to start building credit, it will be the last explored in this post, and the most simple: have a co-signer or qualified co-applicant. A family member who is willing to take responsibility for a person without a credit score mitigates risk for the financial institution, making it more appealing to lend to you. This is an excellent option for a person wanting a higher limit credit card, but does not necessarily have the money to put a large amount down.
Join us here on the KSSU Blog for the next instalment ‘How to Adult: Improving a Credit Score’ where we will take a deeper look into what the magic number means, how the bureaus come up with the numbers, and what to do if you need to turn that score around.