Credit is one of those things you don’t want to be without. But the credit game is 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 some simple moves.
1. Use Self
There are companies that loan money specifically to build credit. Self is one of the most popular.
Here’s how it works: You apply for a loan with Self. Once approved, you don’t receive the money; instead, it’s put into an insured certificate of deposit (CD). You’ll make monthly payments of as little as $25 for one to two years, and when the loan is paid off, you’ll get the money from the CD. In the meantime, your on-time payments will be reported to the three major credit-reporting agencies — Equifax, Experian and TransUnion — and you’ll build credit.
The cost for using Self is a small administrative fee to set up the account, as well as the difference between the interest you’re paying on the loan and the interest you’re earning on the certificate of deposit.
To learn move, visit Self’s website.
2. Become an authorized user
If a friend or family member has exceptional credit and faithfully pays 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 excessive debt and then bail? Inform them that you are only requesting to be added to the account; the magic plastic does not need to be in your possession.
3. 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 you are 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.
4. Apply for a secured credit card
A lot of lenders offer secured credit cards to those who are new to the wonderful world of credit. With secured cards, the lender requires you to make a deposit that is used as collateral. You typically receive a credit limit that’s equivalent to the deposit.
Some lenders may 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.
But before applying, inquire about the creditor’s reporting practices. If they do not report to the three national credit bureaus, your 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% of your credit limit and always pay the bill on time.
Stop by the Money Talks News Solutions Center and use our credit card search tool to filter results for secured cards. Just select “Secured” on the drop-down menu before clicking the green “Search” button.
5. Diversify your debt
The types of debt you have — sometimes called your “credit mix” — account for 10% of your FICO credit scores.
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 that can help demonstrate your ability to handle credit responsibly over time. Potential creditors may also be interested in your experience with different types of debt.
6. 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. Some institutions offer secured or unsecured loans to existing customers in good standing.
7. Apply for a department store credit card
This option 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 fees. Also, store cards without a Visa or Mastercard logo may be exclusive to the retailer, meaning they 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, consider all those factors and don’t get sucked in by an enticing introductory offer.
For more on the pros and cons of this type of credit, check out “4 Benefits and 4 Downsides of Store Credit Cards.”
8. Ask companies to report on your behalf
Making timely payments — sometimes called your “payment history” — accounts for 35% of your FICO credit scores.
If you have recurring expenses — such as rent, utilities or a cellphone bill — you can request that the service provider report your account activity to the three national credit bureaus mentioned above. But only do so if the accounts are current and you have a stellar payment history.