It's a catch-22 we all face when starting out: The only way to create a credit history is with credit, and you can't get credit without a credit history.
Building a credit history has never been easy, especially when starting out or starting over. And the credit crunch of the last few years has made the process tougher.
Here’s an email from a young reader…
I’m a 19-year-old guy, and I’ve had a lot of trouble trying to establish some credit. I’ve tried a lot of things, but it seems there’s just no hope. I can’t get my parents to co-sign anything because one just can’t and the other has bad credit. And nobody is going to give credit to someone who doesn’t even exist (credit wise). So I was wondering: Are there any other ways I could try to establish credit?
We’ve all been where you are, JT. Here are eight ideas that might help.
Idea one: Start with your existing bank, if you have one.
If you already have a checking account with a bank, that’s a good place to start. Assuming you’ve been avoiding overdrafts and otherwise properly managing your money, that should show them you’re a worthy risk: even more so if you have a savings account as well. So walk in and talk to a local branch representative. Be polite, but firm: Explain that you’re a good customer, will be an even better one in the future, deserve credit, and that if they appreciate your business, they should show it by helping you.
Keep in mind, however, that because of the CARD Act, in order to get a credit card you now have to be at least 21, or be able to prove you have a job with sufficient income to pay your bills. If you have a job, your credit line will be limited to the greater of $500 or 20 percent of your annual income. If you’re able to get more than one card, the credit line from all of them can be up to 30 percent of your annual income.
Idea two: If you don’t have a bank account, open an account with a credit union.
Credit unions are typically easier to deal with than big, national banks. I’d stop short of saying they have easier credit standards, but because they’re smaller, they may be a bit more flexible. So if you don’t have an account yet, open a credit union account, then repeat the steps above.
Idea three: Try a signature loan.
As the name implies, signature loans are unsecured loans guaranteed only by your signature. If a bank or credit union won’t give you a loan with just your signature as collateral, offer to secure it by putting money in a savings account equal to the amount of the loan.
A signature loan means paying interest, but if that’s a price you’re willing to pay, it will help you establish credit. In fact, back in the old days before banks started throwing credit cards at anyone who could fog a mirror, this was how I began my credit history – a signature loan from a credit union.
Before going down this road, be sure the lender will report your timely payments to the credit reporting agencies. Otherwise you’re wasting your time and money.
Idea four: Get a co-signer.
As mentioned above, if you’re under 21 and don’t have a job, in order to get a credit card, you’ll need a co-signer: someone who will assume responsibility for your bills if you don’t pay them. There will, of course, be very few people willing to take on that kind of responsibility. Unfortunately for JT, his ability to get any kind of loan will be entirely dependent on the quality of his co-signer’s credit. So if his parents have bad credit, this may not help him.
He could try other potential co-signers, of course, like friends. But don’t let them write me and ask if it’s a good idea. Co-signing someone else’s loan almost never is.
Idea five: Become an authorized user on someone else’s credit card.
If your parents have a credit card, you could become an authorized user on one of their cards. This means you’ll get a card tied to their account. They remain legally liable for the bill, but you get a credit file established. The good news is that piggybacking on someone else’s credit file essentially gives you an instant credit history. The bad news is that if their credit history goes bad, so does yours.
Idea six: Open a department store charge account.
If the ideas above don’t work, you could try to open a credit card account with a department store – they’re typically easier to get than credit cards from banks. These cards, however, carry high interest rates, and obviously can’t be used elsewhere. Then, of course, there are the same issues that you have with any credit card – if you’re under 21, you’ll need a co-signer. But if your co-signer has bad credit, this might succeed where a bank card fails.
Idea seven: Get a secured credit card.
This idea is related to the signature loan idea above. Like securing a signature loan, you can secure a credit card by putting money in a savings account that equals the limit on the card. So put up $500 in savings, get a $500 limit. As with any other card, you’ll still have to be over 21 or be able to demonstrate sufficient income – but even a co-signer with bad credit should be able to get one of these.
You can search for secured credit cards here at our site or many others. But before you get a secured card (or any type of card or loan discussed above) be sure your payments will be reported to all three major credit reporting agencies. No lender is required to do this, and if they don’t, you’re spinning your wheels. In addition, when it comes to secured credit cards, be especially wary of fees: This part of the credit card business tends to attract shady players.
Idea eight: Don’t worry about building a credit history yet.
Credit histories and credit scores are an important part of life in America. But that’s no reason you have to have either if you’re a 19-year-old unemployed student. When I was a student, we didn’t have credit cards, or credit histories, because no bank would think of lending money to anyone without a job. It was a simple system: Graduate, turn 21, get a job, get a credit card.
Can you imagine it? All over the world, millions of young people were walking around paying cash for everything. Sounds crazy, I know, but I swear it actually happened. We never thought about credit scores, much less worried about them, because there wasn’t an ice cube’s chance in hell we were going to have one until we got a job.
Those were the days.