I recently gave a presentation to a group of high-school students about the do’s and don’ts of credit. While discussing credit scores and reports, one of the students asked me about the best ways for young adults to build credit.
Building credit can be challenging for young adults. Since it usually takes credit to get credit, it can be hard to get your foot in the door. Luckily, there are a few safe ways for teens and young adults to build credit in a variety of ways. One way is using a secured credit card.
There are two types of credit: secured and unsecured. The majority of credit cards are unsecured. This means that there is no asset to act as collateral. On the other side, secured loans are backed by an asset. For example, a home or auto loan are both examples of secured credit since the house and auto act as collateral for the loan. If you don’t pay those loans, the lender can take the asset to recoup the loss.
However, there are a lot of financial institutions that offer secured credit cards as a tool to help people build credit. Secured credit cards use cash as collateral for the loan. For example, a borrower would put down $500 cash as collateral and receive a credit card with a $500 limit. The person uses the card and makes payments like a regular credit card. However, if the person doesn’t pay his or her credit card, the lender can use the $500 to recoup the loss.
How did you build your credit?