The consumer credit system doesn’t always make sense. One of the most frustrating things new consumers find out is that you need credit to get credit, which of course you can’t get because you don’t have any. Confused yet? It’s like having a car with an empty tank: you need gas to get to the filling station to buy gas.
But that’s really not true. You can get credit when you don’t already have credit but sometimes it takes a little more effort. You have to actively look for opportunities and be willing to make sacrifices that people with established credit don’t have to. Here are the best work-arounds to get credit when you have none:
Your credit score is calculated from several factors, including whether or not you already have open credit accounts and the age of those accounts. You can take a shortcut for both of those by asking someone you know and trust (Mom? Dad? Brother or sister?) to add you as an authorized user for one of their accounts, like a store credit card.
They don’t even have to give you a card, but simply by adding you to their account, you get credit for all their history for that account. But make sure it’s a good history – if they have late or missed payments, those will become part of your credit history, too.
2. Try a Secured Credit Card
A secured credit card is basically a Visa or Mastercard issued by a bank that requires a deposit in the amount of the line of credit on the card. So for instance, if you have $300, you can send that to the bank and they will issue you a card with a $300 limit. There are a couple of catches, though.
First, you have to use the card. The smartest method is to pay for something you already plan to buy anyway (like gas for your car, for example) and then pay the bill off entirely each month. You also want to make sure you pay the bill after the posting date, which is the date that the bank reports activity on the account to the credit bureau. Be sure to check with the card issuer to determine when the posting date is.
Second, the deposit stays with the bank until they decide you’re not as much of a risk anymore. Make sure the bank you choose offers a path for you to transition to an unsecured account at some point so you can get your deposit back eventually.
Finally, fees for secured credit cards are typically much higher than for unsecured cards. Try to find the lowest annual fees you can but accept that this is part of the cost of building credit.
3. Make Sure Your Landlord Reports Rent
Rent payments were not always reflected on credit reports. Now there are several services available that not only make it easy to pay your rent (and make sure it’s not late!) but that also report those payments to credit bureaus for inclusion on your reports. If your landlord doesn’t already use one of these services, ask if they will look into them. A couple of services are ClearNow and WilliamPaid, but there are other available services as well.
4. Buy a Car
You might be thinking, “How can I buy a car without credit? I thought that’s what I needed credit for.” In the past, that was true, but in recent years, lenders have gotten much more lenient when making loans for automobiles. The reason? A car is real property and acts like your deposit on a secured credit card – it’s collateral in case of default. So even if you have no credit, you can still qualify for a loan. Now, the interest rate will probably be higher and you might be required to have a down payment, but as I mentioned before, that’s just the cost of building credit.
5. Get a Secured Personal Loan
This option lies somewhere between getting a secured credit card and getting a car loan. The idea here is to get a sum of money together (say $500 or $1,000) and put it in a certificate of deposit at a bank or credit union, then using it as collateral to get a personal loan from the institution. The lender feels comfortable because the loan is secured, and you have another type of credit, which is also helpful, since the variety of types of credit on your report also plays a role in your credit score.
No, not all of these options are available to everyone. Using even one can have a positive impact, though, and getting some credit is a start to getting more credit.