The vicious credit cycle! You can’t get much done without good credit scores — you can’t really get loans, credit cards, or even apartments — but how can you show a history of responsible payment without getting credit in the first place? Glad you asked.
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So, there is this thing called a FICO score, and it is used by lenders and credit card issuers to determine how often you repay debts. Are you a notorious squelcher, or have you always paid on time in the past? The thing is, to have a FICO score, you need to have had at least one account open for six months, and you need at least one creditor reporting your activity to the credit bureaus in the last six months as well. Needless to say, it is tough to build up a satisfactory credit score. But, having said that, there are ways.

Apply for a secured credit card

Secured credit cards are most useful to those who have to build up their credit score completely from scratch. They are backed by up-front cash deposits, and the amount is most often equal to your credit limit. You will use this card like any other kind of credit card would normally be used.

  1. Buy things
  2. Make payments on or before due dates
  3. Incur penalties for failures to pay on time

Your cash deposit will be used as collateral in the event that you do not pay at all. And you’ll receive your deposit back when you close your account if no penalties were paid for with it by the lender.

Apply for a credit-builder loan

Self-explanatory really. A credit-builder loan is one that is explicitly given to help people, you guessed it, build up their credit score. Most often, the money that you borrow is held by the lender in an account and not returned to you until you pay off the loan. What a CBL does essentially is force you to save, and every one of your payments (or lack thereof) is reported to the credit bureaus. Credit-builder loans are most often offered by credit unions or community banks, although sometimes there are lenders online as well.

Get a co-signer

It is possible to get a loan or an unsecured credit card by way of a co-signer. Make sure that you and your potential co-signer both understand completely that your co-signer, and not you, is on the hook for any failure to pay on your behalf. Be careful to avoid any awkward situations or destroyed friendships, etc.

Become an authorized user on someone else’s credit card

This is a good bet if you have a family member or a good friend that is willing to help you on the path toward building up your credit. If this is the case, they may be willing to make you an authorized user on his or her card. What this means is that not only will you get to use his or her credit card, but also you will build up, not his or her credit, but your own credit while you are at it. Again, you aren’t legally obligated to pay for any charges. So make sure to warn this person beforehand that this is the case. They are on the hook, and not you. Hopefully, you are trustworthy (wink).

Ask this potential authorizer — the cardholder — if the card issuer reports authorized user activity to the credit bureaus. If they do not, your spending will be wasted, and you will accrue absolutely no credit. But most of these lenders do report authorized user activity to the bureaus. But better to check than to waste your credit-building time.

Build your credit score through the rent that you pay

Rent-reporting services such as Rental Kharma and RentTrack take a bill you are already paying and put it on your credit report, helping to build a positive history of on-time payments. Some credit scores take these payments into account, and some do not. But it just might be enough to get a loan or credit card that establishes you as somebody with good history for any potential lenders.

Takeaway

It may seem like a paradoxical situation. How can I build good credit if nobody takes a chance on me to give me the opportunity to build credit? While that frustration is annoying, it is not insurmountable. There are ways to build up your credit, so don’t lose hope. Once you get the ball rolling, make sure you pay on-time, keep credit utilization low, keep your account open for as long as possible (without opening too many accounts as that lowers your average account age — this lowers your score) and last but not least: check each of your credit reports annually for any errors and just to keep tabs. Always be informed!  

 

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Posted 04.25.2018 - 12:00 pm EST