Establishing a credit history can be difficult and frustrating. It takes credit to build credit. But if you apply for a loan or credit card with no prior credit history, the bank may slam the door in your face. They rely on credit scores and credit reports to determine whether you’re a good candidate for a loan. If you have neither, you’re a risky applicant.
Not to suggest giving up on your efforts to establish credit – it’s all in how you approach the situation. Although some banks may laugh in your face and reject your application, there are lenders ready to help you establish first-time credit.
1. Consider a Gas/Department Store Credit Card
A Visa, MasterCard or American Express may be your card of choice. These major credit cards are desirable because they’re accepted practically everywhere. But without a credit history, getting approved for a major unsecured credit card is a real challenge. Oftentimes, you have to work your way to a major credit card. Take baby steps and start with a gas or retail credit card.
It’s much easier to get these types of credit cards with no credit history. In most cases, you only need an address and steady employment. These credit cards aren’t as appealing because you’re limited to a particular retailer, plus they can have higher interest rates. But if you’re looking to establish credit, these cards can get your foot in the door.
2. Consider a Secured Credit Card
If you’re simply not interested in a retail or gas credit card, and prefer a Visa or MasterCard, consider a secured credit card. Several banks and credit unions offer these types of cards. Because approvals aren’t based on credit scores, anyone can qualify. But don’t get too excited.
Secured credit cards are slightly different from other types of credit cards. As a card designed to help people establish or reestablish credit, these credit cards require a security deposit. The minimum security deposit varies depending on the card, but you can expect to pay between $200 and $500. This is in addition to annual fees, setup fees and monthly maintenance fees. In exchange for your deposit, you receive a credit limit of equal value.
These credit cards are costly, but a good deal if you have disposable income. And because you’re issued a Visa or MasterCard, you’re not limited in where you can shop. Make sure the bank that issues your secured credit card regularly reports to the three major credit bureaus.
3. Apply for an Auto Loan
You may rule out an auto loan due to your lack of credit history. If you can’t even qualify for most credit cards, it’s reasonable to conclude that loans are out the question. This isn’t always the case.
There are several dealerships that work with people who have credit problems. They issue loans to people with no credit, bad credit, even past repossessions. These dealerships typically offer in-house financing, or connect buyers with lenders who issue bad credit auto loans. Like gas and retail credit cards, you’ll pay a higher rate for the vehicle. But if you make your payment on time each month, you will build a better credit history.
4. Get a Collateral-Based Personal Loan
Do you have a certificate of deposit with your bank? Did you know that you can use a CD as collateral for a small bank loan? A personal loan is another excellent way to establish credit. And if you have an active checking or savings account with a bank, it’s easier and quicker to obtain financing.
But like most personal loans, you need some type of collateral. This might include a car title or other personal property. Applicants who can’t provide collateral are often turned down. However, having a certificate of deposit in your name can open the door to loans – and you do not need a lot of cash in your CD. Here’s how it works?
Let’s say you have $1,000 in your certificate of deposit. Visit your bank and apply for a small personal loan – perhaps $500. State that you’re pledging your certificate of deposit as collateral on the application, and provide the bank with your CD information. With the CD acting as collateral, the bank can claim your account if you default on the personal loan.
Once you’re approved and issued the check for your personal loan, deposit this check in a savings account. It is important that you do not spend this money. The purpose of the loan is to establish a credit history, not shop and accumulate debt. Over the next three to six months, pay back your lender with the funds deposited into your savings account. Each timely payment prompts regular credit activity, in which your lender updates your credit report with positive information. This establishes credit, and the more positive updates on your report, the higher your credit score.