Geting Started Borrowing Money and Building Credit
When you’re fresh out of college, you are ready to start doing big things like get your first “real” job and buy your first home. You may need to buy a car, or you may want to start your own business. But in order to do some of those things, you’re going to need financing, and as a young person, you’re likely to find the process difficult and maybe even a bit confusing. You may start having this problem even earlier, like when you try to get financing to pay for college or to buy a car.
It’s important that you know what to expect with financing. Here’s a look at some of the most common financing types to help you understand where to start and how to build your credit:
Short-term loans like installment loans online are a common source of funding for students and other young people. Some short-term loans cause more trouble than they’re worth, such as payday loans that have excessive interest rates. Installment loans are personal cash loans that have minimal requirements. You don’t have to have any credit – you just have to have a verifiable source of income and some other documentation. You can get small amounts – up to $1,000 or more, depending on the lender – which you can use to handle emergency needs, like fixing your car or making up the difference on a semester’s tuition.
Credit cards are another popular form of financing for young people since they are easily obtainable. Some providers want you to have a little credit history before they will approve you, but others provide cards with low credit limits for those with no credit. Gas cards and store credit cards are the easiest to get, and they usually have limits of just a few hundred dollars.
Credit cards are also popular because they give people the freedom to buy whatever they need. However, students often overuse credit cards, so they should exercise caution with them. The high interest rates make it very hard to pay them back. Getting that first credit card can be an easy way to build credit, but if it’s misused, it can also bring down your credit.
Student loans used to be easier to get, but with so many defaults and the weaker economy in recent years, lenders have gotten tougher. You’ll most likely need a co-signor like a parent who has great credit to get approved for a student loan. You won’t have to pay anything on the loan while you’re in school, but six months after graduating, you could be looking at some hefty bills.
Fortunately, interest rates are typically low on student loans, but the monthly payment can be quite high if you borrowed a lot. You’ll have the ability to get on a structured repayment plan or to defer your payments if you find yourself struggling, but student loan debt can almost never be discharged. That means you’ll be on the hook for that debt until you pay it off. Borrow wisely.
If you’ve used credit cards responsibly during your time in college, you may have enough of a credit history to be approved for auto financing to buy a car. Lenders will also consider your income when they review your application, so if you have a nice-paying first job and you have some credit, you have a better chance of getting approved for a moderate loan. But if you’re trying to buy a BMW on an average starting salary, you can forget about it.
Buying your first home is a momentous occasion, but you’ll have to have a lot of credit history to get approved. Mortgage lenders take a fine-tooth comb to your financial portfolio when considering your application. They will look at your job history, your credit history, your outstanding debt, and other financial issues. You must have a good history, a strong down payment, and a low debt-to-income ratio. The best thing you can do when you get out of school is start saving for your down payment and be sure to borrow responsibly.
Building your credit can be easy, but you have to take it slow. Start with small cash loans when you have an emergency, and use other credit cards and loans strategically to get what you need while building a positive payment history.