Applying for your first loan can be stressful, especially if your credit history is patchy. Loan providers require certain levels of income and assets before they lend regardless of economic conditions. You may be able to secure cash advances on your paychecks or even small auto loans without solid credit, but to get a larger loan you’ll need to build your credit history first. The easiest way to do this is with a low APR credit card that allows holders to run a balance for a certain period of time without paying the penalty interest rate.
Student cards are the easiest type of low APR credit card to obtain. Though their credit limits are usually capped fairly low, student credit cards rarely come with annual fees and may offer perks like cash back on select purchases. Using a credit card to pay for small purchases during your college years is a great way to build credit without breaking the bank. Whether you’re enrolled in a community college, four-year undergraduate university, or master’s program, your low APR credit card will back you up.
Congratulations! Building up great credit can be a painstaking process, but several cycles of on-time payments are usually enough to qualify you for your first loan. The next steps in the process involve lots of paperwork. Lenders will ask you for recent tax forms like your W-2, 1099-MISC, and consolidated tax return; a current pay stub that tallies year-to-date earnings; information on debts including credit card statements, rent checks, and car payments, if applicable; and any other pertinent income information like brokerage or retirement account statements.
This sounds like a lot to keep straight, but lenders need a detailed picture of your income to determine exactly how much they can afford to lend. If your first loan is a home loan, your lender may not provide funding unless you can demonstrate that your loan payment will be less than one-third of your monthly income. For folks with bad credit, this number may be even lower, but as long as you’ve been consistently paying off that low APR credit card on time your credit should’t be an issue. Lenders love consistency!
Everyone gets excited for their first loan, especially in our instant-gratification, me-first culture. Most financial experts would agree that you shouldn’t let your excitement get the better of you. Would-be borrowers who take the time to accumulate some savings before applying for their loan find themselves in a better position than those who don’t for two reasons. One, they can afford a bigger down payment and thus smaller monthly payments on a home loan, or more generous financing terms on any other type of loan. Two, their accumulated savings means they won’t immediately have to default on their loan in the event of job loss.
If you can afford to build credit through a low APR credit card, you can afford to build some savings as well. You’ll see why when you get your first loan!