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 seven simple moves:
1. Use Self Lender
There are companies that loan money specifically to build credit. Self Lender is one of the newest and most popular.
How it works: You apply for a loan with Self Lender. Once approved, you don’t receive the money; instead it’s put into an insured certificate of deposit. 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. In the meantime, your on-time payments will be reported to the three major credit reporting agencies and you’ll build credit.
The cost for using Self Lender 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. You’ll also get free credit report monitoring during the process.
As an example of how Self Lender works, according to their website, if you choose the $25 per month plan, you’ll pay a $9 administrative fee. Then you’ll make 24 payments of $25, for a total of $600. After two years, you’ll get $525. So your cost of building credit will be $75 + $9, or $84.
Learn more here.
2. 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 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. A 2016 survey found that 38 percent of co-signers lose money.
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. For these, the lenders require 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 — Equifax, Experian and TransUnion — 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 percent of your credit limit and always pay the bill on time.
Money Talks News’ credit card search tool allows you 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 percent 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 those 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 “Should You Get a Store Credit Card? It’s Tempting.”
8. Ask companies to report on your behalf
Making timely payments — sometimes called your “payment history” — accounts for 35 percent 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.
How did you begin your credit journey? Let us know in the comments below or on our Facebook page.
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