I’m young and have bad credit. What do I do?

Dear Debt Adviser,
I have bad credit with my bank, and I’m making payments on what I owe, but I still have no credit. What credit I have is bad because I am so young, and I have hardly anything in my name. What’s the best way for me to establish credit?
— Blair

Dear Blair,
You don’t have bad credit because you are so young and have hardly anything in your name. You have bad credit because you didn’t pay your bills as promised.

I don’t point this out to be mean. But if you don’t understand what’s wrong, chances are you’ll have a very hard time fixing it. And fix it you can, with a few simple steps! What you need are some goals, a spending plan, some savings and, finally, to pay your bills as agreed every month, not just sometimes. Here’s how to get started:

First comes the goal-setting. Just imagine your world in two, five and 10 years. Once you have a picture of how great it will be, you also have an incentive to save and build your credit.

Next, create a spending plan. Start by adding up all your sources of income, and then write down all your expenses. If you are new to developing a plan, a good exercise is to take a month and write down every expense, whether it’s a debit card transaction, check, automatic payment or cash. Then, separate your expenses into categories based on your spending for the month. You might be surprised to learn what you are spending your money on and how much you are spending. If your expenses are more than your income, cut back so that your income covers all your expenses and allows for savings.

Once you have a spending plan in place and you are building savings for your goals and an emergency fund, you can move forward with seeking new credit to help establish a positive credit history. Two credit products can help credit newbies like you establish credit: a passbook loan and a secured credit card.

Passbook loans are small loans secured by a deposit made by you into an account at the bank that issues the loan. You make regular monthly payments for a specified time (one to two years, typically) as you would with other installment loans such as a car loan. If you decide to apply for a passbook loan, be sure the bank reports the loan to all three credit bureaus because if the loan is not reported, it won’t help with building your credit. The required monthly payment on the loan must be part of your spending plan, so you know you will have no trouble meeting the payment.

A secured credit card works in much the same way in that you deposit your own money with the issuing bank and may use the card to make purchases up to the amount you have deposited. You must make at least the minimum payment due each month, but I would recommend that you charge only what you can repay in full each month. Again, using the credit and making the payments must be part of your spending plan.

Another possible avenue to establish credit is as an authorized user on a parent’s credit card. You do not even have to have an actual card issued to you to benefit as an authorized user on the account of a parent with a positive credit history. The account information is posted to your credit reports, and as long as your parents pay the account on time and as agreed, the monthly positive information will help put your bad credit history in the past.

Good luck!

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