One of the most common questions I get is “if I don’t have credit then how can I establish credit?” It’s a catch-22 if I’ve ever seen one.
It seems that some people have a hard time establishing credit. These folks come from several groups. Some are young people who have never had credit. Some are new to this country and don’t have any history of U.S credit to show people. And some folks had credit at one time but, for whatever reason, ended up with trashed credit reports and horrible credit scores. This last group is really trying to re-build credit.
Most reputable lenders in this country want you to have some sort of credit experience before they will start giving you their best deals. Fair enough, isn’t it? I mean, I certainly wouldn’t want to give someone a $25,000 unsecured credit card as their first ever credit account. No way!!
But, if someone had a few years of a credit history and showed that they were able to pay their bills on time and manage their debt well I’d give them a shot. That’s part of being a lender…you have to take on risk that you might not really be comfortable with. Heck, anyone can say “I only want to do business with people who have a 20 year old credit history and FICO scores greater than 780.” Yeah, welcome to the overcrowded party.
Today lenders are so desperate to find new revenue sources that they are more and more willing to offer their products to people with little or no credit history. However, they do draw a line somewhere. And your rates and terms will not be very impressive if you’re new to the credit game.
Here are a few groups of interest. Which group do you fall in?
Students and young people – My first credit card was a Citibank student card. It had a $300 credit limit and the application was sitting in my university mailbox just waiting for me. Their strategy was simple…become the first card in my wallet. Perhaps it would cause me to remain loyal to Citibank since they were my first. Did it work? Well, today 20 years later I still have a Citibank credit card.
Typically it’s more difficult for students and young people to apply for and receive credit at really good rates and terms because they simply don’t have any credit history and few lenders are willing to give their best products to people who haven’t proven that they can manage many different types of credit responsibly over a long period of time.
New to the U.S. – People who are new to this country run into the same problem as the young people and students. They have no history to show anyone. Well, that’s not exactly true is it? They may have years and years of solid non-U.S credit history but there is no way to show anyone in the United States. That’s the real problem.
Unless you are a Canadian moving to the U.S then it’s unlikely that the credit history from your home country will ever benefit you here. There are some lenders who can access your Canadian credit history but that’s where it ends. If you are from any other country then you might as well be starting over because you really are. You have no domestic credit reports and lenders don’t have the time or patience to try and reconstruct your foreign credit history. They’ve got 100 other loan applications to worry about.
The rebuilders – There are more of these people than the other two groups combined. These are the folks who have already established credit and, for whatever reason, abused it to the point where they can’t get approved at anything other than loan shark rates.
It’s likely that if you are in this group you got here because you lost a job, got divorced, had a death in the family or had some sort of major medical disaster that zapped your savings. Or maybe you just screwed up and couldn’t manage your own credit. You may have even filed for bankruptcy. The point is that the reason doesn’t matter. Nobody cares why you are here…the point is that you’re here and that’s what really matters now.
Your challenge is to figure out how to establish credit now that your history has been ruined for the next decade or longer. It’s going to be more difficult for you because you can’t avoid credit use like an 18 year old can. You need a house and a car to survive. And you have a family and children to take care of. It’s going to be expensive for a while until you can convince lenders that you have learned your lesson and won’t screw up again.
The Solutions – The good news is that there are several ways to re-build, establish or re-establish credit. The bad news is that if you don’t do your research then you’ll spend a lot of time trying to establish the wrong credit.
Secured Credit Cards – A secured credit card is when you open a credit card account but give the issuer a deposit. Normally the amount you deposited will be your credit limit. So, if I send the issuer a $300 deposit then my credit limit will likely be $300. If you don’t pay your bill then they’ll just take it out of your deposit.
Secured cards are great for all of our groups above. They are great because you are essentially buying the credit account. As long as your check clears then most banks will approve your secured card application. And, if you pay your bill on time then it will almost immediately begin to build a solid credit history and solid credit scores.
The drawbacks are important for you to understand too. Most secured cards come with lots of fees. And, those fees are generally charged to the account.
You will also have to make sure that the credit card issuer reports the account to all three of the credit reporting agencies. If not, then you aren’t getting credit for it on all of your credit reports or in all of your credit scores…so what’s the purpose, right? Ask the issuer if they report to all three credit reporting agencies before you open the account.
And last but not least, the credit limits are almost always very low. This is bad for a couple of reasons. First, you can’t really use the card in any meaningful way because your credit limit might only be a couple hundred bucks. And, any usage will likely lead to a very high “revolving utilization” percentage. For example, if your credit limit is only $200 and you go out and buy a $100 worth of groceries on the card then you’ll be 50% utilized according to your credit reports…that’s not good. You’ll want to be very careful with how much you charge or your scores will never be as good as you want them to be. Keep your monthly balance to less than 10% of your credit limit and you’ll be fine.
Do your homework before you open a secured card. If you have to put up with the hassle and fees you, at the very least, will want it to benefit you as best possible.
Borrow someone else’s credit – Does that make sense? Let me clarify. I’m not suggesting that you go out and commit identity theft. I’m also not suggesting that you ask someone to apply for a loan WITH you as a co-signer or joint borrower. What I’m suggesting is almost risk free to everyone involved.
You should become familiar with the term “authorized user.” An authorized user is someone who is allowed to use the credit card of another person but has no real financial liability for that account. You get a card with your name on it but you don’t have to pay the bill…ever!! Someone else is responsible for the bill. How great is that?
The best news is that that many banks and credit card issuers will add the account history to the credit reports of the authorized user even though it’s technically not their account. This immediately conveys the value of that account to the authorized user’s credit reports and credit scores. It’s beautiful.
The drawback is this…if the owner of the account stops making payments or maxes out the card then your credit will suffer just like their credit will suffer. But, there’s good news even in this bad news. If for some reason the owner of the account starts falling behind or has too high of a balance you can easily have the account removed from your credit reports because you are not liable for it.
The best scenario is for someone to add you as an authorized user to their credit card but never let you have a card. You get the benefits of the account being on your credit reports and they don’t ever have to worry about you using (or abusing) the card.
So in these two examples did you establish credit? Yes, you sure did. You have accounts on your credit reports that are helping your credit scores and lenders now have something to look at when you apply for credit.
So, did you REALLY establish credit? No, you didn’t even come close. In one example you essentially paid to open an account and in the other you borrowed someone else’s account. You didn’t establish anything…but you kinda did.
I know it’s confusing…but don’t worry too much about it. Your goal is to get to the point where lenders will offer you their competitive rates and terms. If it takes you borrowing someone else’s credit as an authorized user then so be it. That’s how hundreds of thousands of people build their credit reports every year.
So if you can use either of these two strategies to accomplish your goal then congratulations…you’ve just established credit without actually establishing any credit.
@InstallmentLoansNetwork we are on a mission to simplify the online loan process and help borrowers make good credit decisions.