Creditors and lenders look at your credit score to determine whether or not they will give you a loan or a credit card. But if you don’t already have a credit history they’ll be unlikely to loan you any money since they have no way of knowing whether or not you’ll pay them back.
Young people are often left wondering how to establish credit for themselves when no one will give them a chance. How can they prove they’re responsible and can be trusted to pay back what they owe if no one will loan them any money?
If you’re caught in this situation, I don’t blame you for being frustrated. It just doesn’t seem fair, does it? But don’t give up just yet because there are some steps you can take to start building up your credit from scratch.
How to Establish Credit Without a Credit History
1. If you can’t qualify for a credit card from Visa or Mastercard, try the mall. Department stores like Macy’s and Sears generally have less stringent standards when issuing credit. Open up an account and make a small purchase (you may even get a discount or reward of some kind). Be sure to pay it off promptly and then repeat the process again and again. This will build your credit score and demonstrate that you can pay your bills on time.
Just be careful not to overspend. The interest rate and fees for department store cards are unbearable so you want to make sure you don’t carry a balance.
2. Another option is a secured credit card, which requires you to deposit a certain amount with the lender issuing you credit. The amount of your security deposit is equal to your credit limit. This protects the lender in case you can’t make your payments, and you’ll be building up your credit as you demonstrate you can make your monthly payments on time.
You might even be able to earn a little interest to offset the fees you pay on your card. For example, when you apply for the USAA Secured Platinum Card you also open a two year Certificate of Deposit. The money you put in (from $250 to $500) is the card’s credit limit and you will earn interest on the amount you deposit.
3. If you can’t get either a secured card or a department store card, you can ask someone with a good credit history to make you an authorized user with your own card. You will be responsible for paying the bills, but if you screw up you’ll both suffer the consequences as any late or missed payments will show up on his account too. If a family member is willing to take that chance on you, it’s a good way to start building credit quickly.
Another bit of advice…don’t forget to check your credit report regularly and keep paying all your bills on time. Establishing a good credit history is only the first step. You’ll have to work hard to continue building and maintaining it for years to come.