Here are tips to help newbies in the credit world borrow money and build a credit history.
Credit is one of those things you don’t want to be without. But, as we all know, the credit game is definitely a Catch-22. You need a good credit history to snag the best deals on loans, yet it’s very difficult to get credit without a borrowing history.
So what’s a consumer to do? Here are seven simple moves:
1. Become an authorized user
If a friend or family member has exceptional credit and faithfully pays their bills on time each month, request to be added as an authorized user to that person’s credit card.
Afraid that your prospect will say no out of fear that you will rack up an excessive amount of debt and bail out? Inform them that you are only requesting to be added to the account; the magic plastic does not need to be in your possession.
While this is a simple way to start building your credit as long as the original cardholder maintains stellar credit habits, the weight given to accounts in which you are an authorized user varies by lender and it might not be as effective as you think.
2. Get a co-signer
You can also request that a close friend or family member with good credit co-sign a loan with you.
Keep in mind that that’s asking a lot, because the co-signer becomes responsible for making the payments if you don’t pay. We generally advise people to avoid co-signing loans for other people because of the risk involved. But, plenty of people do it: About two-thirds of millennials surveyed say they have used co-signers — usually parents — to help them establish credit.
3. Apply for a secured credit card
Lots of lenders offer secured credit cards to those who are new to the wonderful world of credit. They mandate a deposit to be used as collateral and typically have a credit limit that’s equivalent to that amount.
Some lenders refund the deposit and convert the card to an unsecured product after you have shown your ability to handle debt responsibly over an extended period of time.
But before applying, inquire about the creditor’s reporting practices. If they do not report to the three major credit bureaus, account activity will have no bearing on your credit profile. Also, shop around to avoid secured cards with excessive fees, keep your outstanding balance under 20 percent of your credit limit and always pay the bill on time.
4. Diversify your debt
Although the type of debt you have accounts for only 10 percent of your FICO score, it can have a significant impact if there isn’t a lot of other information present in your profile.
In lieu of revolving debt products, such as credit cards, you may want to apply for some sort of installment loan — a car loan, perhaps, or a personal loan — because it can demonstrate your ability to handle credit responsibly over time. Potential creditors will also be interested in your experience with different types of debt.
5. Check with your financial institution
You may have read the last point and thought, “How in the heck am I supposed to go about obtaining an installment loan when I don’t have any credit?”
The first step is to contact your bank or credit union, explain your situation, and see what options you have. Many offer both secured and unsecured personal loans to existing customers in good standing.
6. Apply for a department store credit card
This option definitely requires self-discipline.
Department store cards aren’t as difficult to qualify for as standard credit cards, but they may be accompanied by higher interest rates and excessive fees. Also, store cards without a Visa or MasterCard logo may be exclusive to the retailer and can’t be used elsewhere.
If you take this route and quickly max out the card, you will do more harm than good to your credit profile. So before you sign on the dotted line to apply for a department store credit card, take all those factors into consideration and don’t get sucked in by the enticing introductory offer. For more on the pros and cons of this type of credit, check out “The Rewards Are Tempting but Should You Get a Store Credit Card?”
7. Ask companies to report on your behalf
I’m almost certain you’ve constantly been reminded about the importance of making timely payments because this factor accounts for 35 percent of your FICO credit score. Assuming you have recurring expenses each month, such as rent, utilities and a cellphone bill, request that the service provider report your account activity to the three major credit bureaus. But only do so if the accounts are current and you have a stellar payment history.
Before you actually move forward and seek credit, you have to ask yourself if it’s something you really need. It doesn’t make sense to purchase an item on credit that will end up costing you an astronomical amount of cash in the long term because of interest and fees. The smart credit card user pays off the entire balance each month.
And by no means am I an advocate of obtaining new credit accounts and making purchases just for the sake of establishing credit — unless you were going to buy those items anyway.
How did you begin your credit journey? Let us know in the comments below or on our Facebook page.