A Catch 22: Getting Credit With No Credit

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It’s like the job you can’t get right out of college because you lack experience. How are you supposed to get the experience if no one lets you? And so it goes with getting credit. Lenders won’t likely give you credit until you’ve proven that you’re creditworthy.

Because of this reality, you have to get a little creative and have a little patience. You need a strategy, and hopefully these tips will help you form one. Don’t worry – with a little time and a little work, you’ll be building credit in no time.

Here are ways to address this conundrum of credit; this “catch 22”:

1. Become an Authorized User

This is a great option for students or spouses needing to build credit. By your parents or spouse adding you as an authorized user on their account, your credit becomes tied to their credit. That means if they are making regular payments and staying in good standing with the creditor, this positive credit history will benefit you as well. Just make sure that you choose this person wisely, since the point is to help your credit, not hurt it. Also make sure that you are responsible with this new spending power, since you’re affecting someone else’s credit if you aren’t. Not cool.

2. Get a Credit Card with Your Bank

I got a student checking account when I was in high school, and after about a year of being responsible with that account, I applied for a credit card through my bank. They gave me a tiny limit, but over the years, they steadily increased it. I still have that credit card today and it has given me great length of credit history. So if you have already been banking responsibly somewhere, consider applying for a credit card through your bank. Your chances of approval may be better since you have already shown them that you are capable of handling that account.

3. Get a Secured Credit Card

This is a good option, especially for those who have already made a few mistakes. Maybe you were extended credit, but weren’t so creditworthy? Applying for a secured credit card is your best bet for re-earning creditor’s trust. There’s built-in accountability here, since you are creating your own credit limit by the deposit you make when opening the account. When you’ve narrowed down secured credit card options, find out how often they report to the credit bureaus. The more often, the better.

4. Pay All of Your Bills on Time

This applies to those who already have bills of some kind. Phone bills, utility bills, rent, insurance, etc. Never pay late. Just don’t do it. For one, it creates the possibility of a habit forming – one that isn’t going to work in your favor. Secondly, it reflects poorly on your ability to steward your finances. Creditors want to know that you have your finances together. Bottom Line: Late payments will hurt your payment history on your credit report, thus lowering your score, making you less creditworthy, and decreasing your chances of being approved for credit.

5. Make Your Rent Count

This one is pretty nifty. First, find out if your landlord is reporting your positive payment history to the credit bureaus. If not, you can take matters into your own hands by using a third party service like WilliamPaid to pay your rent. There is a small fee (currently 2.95%) for doing this, but with it you have the capability of reporting your payments to the credit bureaus and helping your credit score. Also check out RentalKharma, which will report your rental payment history for up to two years for free!

6. Get a Co-Signer

If you’re looking to take out a loan, consider getting a co-signer. This works somewhat like an authorized user, since the co-signer is taking a bit of a gamble being tied to a loan where you are the primary. Because of this, certain ground rules should be set up in advance to create accountability and ensure trust. Also like the “authorized user” scenario, you’ll want to pick someone with good credit (or you may face a decline, which would be awkward for everyone). The better their credit, the better interest rate you will receive. Once you are approved with a co-signer, continue to make on time payments. This will ensure a positive impact on your credit and theirs. Win-win!

 

Now go and build, build, build! And comment below if you have any questions or your own experience to share!

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