If you happen to be in the category of the population that has little to no credit, known to lenders as having a “thin file,” you already know that it can be very difficult to find a creditor willing to take a chance on you. Those in this predicament usually ask the question, “How can I build credit if no company will offer me a credit line?” This is one of the paradoxes of the credit system in the United States, and if you do not have a good strategy for getting started, you could find yourself applying over and over again only to end up with a multitude of denials coupled with hard pulls. This can make you look desperate to creditors, thus locking you in a vicious cycle just to try to get your first revolving account.
Luckily, there are some strategic options, depending on your circumstances, that can make your journey to building a secure foundation of credit much easier than just taking a stab in the dark.
1. Use a cosigner: If you have a parent, spouse, other relative, or just a really good friend who is willing to guarantee a line of credit with you, this is the fastest way to build great credit. However, for the person cosigning the loan, it is important to understand that they are taking on considerable risk by doing so. If you do not pay your required payments, then the responsibility falls upon them. Only use a cosigner if you have absolutely pure intentions about paying the loan back; because there is no faster way to destroy a relationship than by defaulting on a financial obligation and leaving your loved one to pick up the tab.
2. Secured credit cards: A secured credit card is just like any other credit card, except you place an amount of money equal to your credit line as collateral to secure the debt. Then, you simply use the credit card when you need it and make payments accordingly. These cards generally report to the 3 major bureaus and can boost your credit in a rather short period of time. In fact, some of our past clients have seen their score increase by 150+ points or more in less than 6-months time. Now, while that may not always be typical, if you get a secured card and use it responsibly, you will see a significant boost in your score, and you will be well on your way to building a solid foundation with a path to gaining the ability to access unsecured lines of credit within a considerably short time frame. There are many different options out there for secured credit cards. If you have an account with a bank or credit union, it is likely that they offer a secured credit card option; however, some of the major credit card companies, such as Capital One offer nice options for secured cards as well, including partially secured options and unsecured credit line increases after making on-time payments for as little as 5 months.
3. Pay your bills on time, all the time: This is a topic that gets misrepresented easily. Paying bills such as cable, internet, telephone, and electric will not actually increase your credit score at all. However, if you miss payments and end up with your service disconnected, the debt will be sold to a collection agency, who will have no problem making sure that the negative payment history and outstanding bad debt is reported to your credit file. The same is true of medical bills, as so many people with good intentions end up with thousands of dollars in collections accounts on their credit reports before they’ve ever even had a chance to have a revolving account, such as a credit card or a loan. In fact, the majority of people who use credit repair services have fallen victim to this problem, where they end up with bad credit before they even get started. While these types of accounts can usually be successfully disputed and deleted, doing so still takes quite a bit of time and effort. Instead, make it a habit to become almost obsessive in your goal to pay your bills on time. Doing so will definitely pay off in the long run.
4. Use a credit union to get a small personal loan: Years ago, when banks and credit unions considered extending a line of credit to someone, they looked at the person’s entire financial situation. Now, as more and more lenders relying on scoring models like FICO8 and FICO9, more weight is put on your numerical score than anything else. Unfortunately, this means that, to most lenders and potential creditors, you are nothing more than a number. In fact, just about the only type of financial institution that will give you a chance based upon the entire financial situation is a local credit union. With credit unions, account holders are actually part owners of the institution as a whole, and profits made by credit unions stay local to that institution. Thus, credit unions are much more likely to give someone with no credit a small installment loan to help them get started building credit. The key here is to simply open an account with the credit union and make regular deposits, keeping your account in good standing for around 6 months. After you have done this, ask to speak to a loan officer and explain what you are trying to do, but that you have no credit. They will usually offer you a small unsecured personal loan somewhere around $500 to $1000 in total. Ideally, if you are simply trying to build credit and there is not really a financial need, you can simply place the loan proceeds into a separate savings account and have the loan payment paid out of this account every month. Then, once you have made around 6 monthly payments, just pay it off. You’ll probably end up paying around $25 in total interest doing it this way, maybe less, and you will end up with a very high starting credit score. This is by far the best way to establish credit, especially if you have absolutely nothing on your credit report.
5. Consider a store card/catalog card: Because store cards can only be used at a particular retailer, the requirements for creditworthiness are usually much lower with these types of accounts. One of the best options here is Amazon, who offers both store credit that can only be used on Amazon as well as Amazon-branded major credit cards that can be used anywhere. Believe it or not, Amazon has been known to extend lines of store-only retail credit to people with scores in the mid-500s. However, there are some that have even easier approval odds, such as Fingerhut. If you have no credit, you will likely be given a small credit limit, somewhere around $300, that you can use through their mail-order catalogs or on their website. Even if you have a few collections accounts on your file, they will approve you for a “fresh start” account, in which you make a small down payment on your first order and pay the total off in 6 months. At the end of this “trial run,” you will be granted an unsecured line with them. Both of these accounts report to all major credit bureaus, meaning that you will build positive credit fast, so long as you make your payments on time.
6. Always have a plan! This is good advice for everything in life but is especially important when setting goals with regard to your credit. You will get nowhere if you make random moves here and there without a real path planned for your future creditworthiness. For instance, if your goal is to be able to obtain a $200,000 mortgage, make it a point to research, research, research until you know exactly what it will take. Contact multiple mortgage lenders to determine the lender that will best suit your needs. Find out if you have anything at all on your credit, even the smallest of past-due collections accounts, that could stand in your way or leave you with a higher interest rate. If you set goals and clearly understand what it will take you to reach these goals, you will ultimately be successful. In making your plan, it would be a great idea to obtain a professional credit analysis, in which a credit specialist will go over your current situation and your options with you and help you build a solid strategy for the future.
7. Learn the tricks of the trade: Do you understand credit utilization and debt-to-income ratios? Both of these have a great impact on your overall credit score, as they are weighted very heavily on modern credit scoring algorithms. Credit utilization refers to the amount of available credit you have versus your overall credit limits, and debt-to-income ratio represents the percentage of your income that is going to pay your debts. As you start to get small lines of credit, such as a secured credit card, you will maintain a much higher credit score if you keep your credit utilization low. Simply put – don’t overextend yourself and don’t max out your cards. If you adhere to these two principles, your score will continually get better and better as you build your foundation.
Building a solid credit foundation for the first time can be a scary and daunting task, but it does not have to be. While recent trends over the last couple of decades now show a preference for a high credit score above all else, there are still several options that you can pursue to build your credit from scratch. While cosigning is the easiest and most traditional option, let’s face it – if you are reading this, you probably do not have people that are able and/or willing to place their own credit on the line for the sake of building your credit. Whatever your circumstance, you can benefit from a professional credit analysis to help you plan your strategy for reaching and maintaining your credit goals.
Credit Products Linked:
- Fingerhut (www.fingerhut.com).
- Capital One Secured Card (https://www.creditcards.com/credit-cards/capital-one-secured-mastercard/)
- Amazon.com card (www.amazon.com)