Building a credit history was never easy, especially when starting out or starting over. And the credit crunch following the Great Recession made the process more difficult, as lenders tightened standards. Things are a little looser these days, but it’s still a challenge.
Here’s this week’s question:
I’m an 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?
Here’s your answer, JT.B: Establishing credit isn’t easy, but it’s not as tough as it may seem. Here are some ideas to get you started.
1. 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 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 (which JT.B isn’t) or be able to prove that 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.
2. 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, I’d open a credit union account rather than one at a bank, then follow the steps above.
3. Try a signature loan
Especially if you deal with a credit union or if you’re turned down for a credit card, you might try to get a signature loan. As the name implies, signature loans are unsecured loans guaranteed only by your signature. If the credit union won’t give JT.B a signature loan with just his signature as collateral, he could secure it by putting money in a savings account equal to the amount of the loan.
A signature loan means paying interest as the loan is repaid, but this is a way to build credit. In fact, back in the old days before banks started throwing credit cards at anyone who could fog a mirror, this was the technique I used to begin my credit history. But before going down this road, be sure the credit union will report your payments to the credit reporting agencies.
4. 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. And unfortunately for JT.B, 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.
5. 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 is bad, so is yours.
6. 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 most can’t be used elsewhere. Then, of course, there’s the same issue 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.
7. 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 $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.
One place to start searching for secured credit cards is here at our site. But before you get a secured card (or any type of card or loan discussed above), be sure that your payments will be sent to all three major credit reporting agencies. No lender is required to do this, but if they don’t, you’re not doing anything to build your history. 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 characters.
8. 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 must have either if you’re a 19-year-old unemployed student. Back in the olden days when I was a student, nobody had a credit card because banks wouldn’t lend money to people without steady jobs. It was a simple system: Get a job, make money, get a credit card.
Can you imagine it? All over the country, millions of human beings under 21 were walking around paying cash for everything. Sounds insane, I know, and I’m not sure how we survived, but somehow we did it.
Other articles to check out:
- “Boost Your Credit Score Fast With These 7 Moves”
- “12 Surprising Ways to Wreck Your Credit Score”
- “How I Got a Perfect 850 FICO Credit Score”
- “Get Help Restoring Your Credit”
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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