It can be difficult to establish credit. And if you don’t have a credit history, it’s hard to get a loan, a credit card or even an apartment. But how can you develop a credit history that shows you’re paying back what you borrow, if no one gives you credit in the first place?
In the United States, for example, to have a credit score you must have at least one account that has been open for several months, as well as a creditor who has reported his or her activity to a credit bureau.
Some measures that can help you establish a credit history include:
- Secured credit cards
- Secured credit builder loan
- Loan with a co-signer
- Authorized user on someone else’s credit card
Whichever option you choose from the above four, make sure you use it in a way that will eventually get you a good credit score.
1. Apply for a Secured Credit Card
If you want to start building your credit score from the beginning, you’ll probably need to start with a secured credit card. An insured card is backed by money that is deposited at the beginning; the amount of the deposit is usually the same as your credit limit.
This card works just like any other: you can make purchases, make payments on or before the due date, and earn interest if the balance is not paid in full. The cash deposit is used as collateral if payments are not made.
When you close the account on this card, your deposit will be returned to you.
The purpose of a secured card is to build enough credit and qualify the user for an unsecured card without a deposit and with better benefits. You should choose a secured card with low annual fees. Also, make sure that the company that issued it, sends reports to the three credit bureaus – Equifax, Experian and TransUnion.
Secured credit cards are not used indefinitely. After being used to establish your credit, you can then apply for a regular credit card.
2. Apply for a Secured Loan
This loan, which is also called a credit builder, is exactly as its name suggests. Its sole purpose is to help people establish credit.
With a regular loan, you can be approved for a certain amount, and then you get the money up front and start paying it off. With a loan to establish your credit, the amount you borrowed is held by the lender in an account and you do not receive the loan money until after you have made all your payments. This is some kind of forced savings program.
If the loan is repaid as scheduled and fully, the financial institution promises to send a good report to the credit bureaus. Ideally, you will improve an average 35 points with six months of timely payments for loans as small as $100.
These loans are often offered by credit associations or community banks.
3. Get a Co-Signer
It is also possible to apply for a loan or secured credit card using a co-signer as guarantor. But you must be sure that you and the co-signer understand that the co-signer is responsible for the total amount you owe, if you fail to pay.
4. Become authorized user on another person’s credit card
A family member or partner may allow you to add yourself as an authorized user to their credit card. As an authorized user, you will be able to access a credit card and build a credit history, but at the same time you will not be required to pay for the charges.
Ask the cardholder to find out if the bank that issued the card reports the activity of an authorized user to the credit bureaus. That activity is usually reported, but you must be sure, otherwise you will spoil your efforts to build your credit.
You must agree on how to use the card before you are added as an authorized user. If the cardholder expects you to pay your share, be sure to do this even if you are not legally required to do so.
Get Your Credit Reports
In the United States, you are entitled to one free credit report every 12 months from each of the three national credit bureaus. A credit report is a snapshot of how you use your credit.