You can establish a credit history sooner than you think with these credit-building methods.
It’s enough to drive someone applying for a car loan right over the edge of the steepest cliff of frustration. You don’t have a credit history for the lender to evaluate, so you can’t get a loan. But how are you supposed to start building payment and other credit history if no one will extend a loan or credit card to you in the first place?
Fortunately, you’re not the first person with this credit quandary. Why is that good? Because banks, credit unions, and credit card companies still want your business, so they’ve created products specifically designed for people with no or little credit history.
1. Apply for a secured credit card
With a secured card, you deposit a small amount of money – ranging from $50 to $300, for example – with the credit card company issuing the card. Then the card issuer sets your credit limit for that amount. So, if you deposit $200, your credit limit will be $200.
This secured amount eliminates any risk to the credit card company if you should fall behind or stop making payments on the card. Remember, the whole point of a secured credit card is to build a credit history to establish a credit report and score. So. make sure the credit card company is one that reports your payment history to major credit bureaus.
Tip: Choose a secured card that lets you graduate later to a traditional card with a higher limit once you’ve made timely payments for an extended period.
2. Take out a credit-builder loan
Many banks and credit unions offer what’s known as a “credit-builder” loan, a small loan that lets you build a good credit history. A credit-builder loan doesn’t work like a traditional loan, but that’s the reason some lenders are willing to offer this no-risk type of loan.
With a credit-builder loan, you make payments on a “loan” amount the bank or credit union deposits into a savings account that you can’t access.
Then after you pay off the total amount, usually with small payments over a 6-to-24 month period, you’ll receive back the money that you paid – and now have a credit account with a positive payment history on your credit report.
3. Sign up for Experian Boost
Sometimes the reason you can’t get a loan or credit card is that you have a “thin file” with maybe only one or two accounts listed on your credit report. For example, you may not have enough credit accounts in your history because you’re young, an immigrant or recently divorced, you may not yet have a credit score. If that’s the case, don’t despair.
If you have at least some credit history on your credit report, you might be able to bump up your credit score immediately or finally become scorable by signing up for major credit bureau Experian’s “Experian Boost.” The free tool allows Experian to securely connect to the online bank accounts that you use to pay utility and cell phone bills.
Then those accounts are then added to your credit report, counting toward a higher score and positive payment history as long as you pay on time.
4. Apply for a retail credit card
Many consumers’ first credit card was a gas or retail card, since these types of cards have less stringent approval guidelines. So, even if you have no credit, try applying for a retail or gas card. If you are denied, apply for a different card later. You could eventually be approved for a card from a different credit card company.
Once you have a credit card, use it sparingly and pay off the balance each month to establish a positive payment history to make obtaining credit easier in the future.
Find out: How to Build Credit
5. Get a co-signer on a loan
If you don’t have any credit history so can’t get approved for a car loan, consider asking a parent or other trusted family member to co-sign on the loan. The account and payment history will appear on both your credit reports, allowing you to build a positive payment history as long as you make payments on time.
The downside of this method is that if you fall behind on payments or default on the loan, the co-signer’s credit – in addition to your own credit – will be negatively affected. If that happens, your credit won’t be the only thing that suffers. Your relationship with the co-signer could also be dented.
6. Become an authorized user
Another way to establish a credit history so you have a credit report and eventually a credit score is to become an authorized user on someone else’s credit card account. That way, your own credit history will benefit from their positive payment record.
Just make sure the person has a good credit history before you become an authorized user, since your credit will also be harmed if the primary account holder pays late or falls behind on payments.
Click here to sign up for our free financial education email course.
Published by Debt.com, LLC