Got No Credit? Here's How To Build Credit Effectively
While it is true that few things in this world are more frustrating than having bad credit, the one thing that may top this is having no credit at all. Having no credit means that your financial history is "unknown" to a credit card company. You have absolutely no payment history in which they can base a decision on. Given this situation, many of these companies aren't comfortable with taking a gamble on individuals with no financial track record in the current economic climate. But the good news is that you can still obtain a credit card, even if you have no credit history whatsoever. You can certainly start somewhere and work yourself to a point where you've developed a decent credit history. Here are a couple of good tips to get going:
Get a secured credit card. Secured credit cards are cards that extend you a line of credit based on some amount you deposit with the card issuer. These cards will often have a set limit that may be increased by additional deposits or by maintaining a good payment history. They allow individuals with no credit a chance to establish a good credit history. Also, they are easy to get. In a typical secured card scenario, you apply for a credit card with the issuer and make a deposit into a savings account held by that credit card company. In most cases, the deposit can be anywhere from a few hundred dollars to several thousand, and the deposit will usually earn interest. The card company will issue a credit card to you and will set the limit to match the amount of your deposit (or it may be slightly higher). As long as you make your regular monthly payments on time every month, the money in your savings account will be preserved. However, if you default, the credit card company will take control of your account and apply the funds against your outstanding balance. This way, there is little to no risk for the credit card company, which is what makes getting these cards easy for individuals with no credit. Also, many secured credit cards provide a report of your financial records to the major credit bureaus. This will allow the bureaus to begin tracking your credit and will allow you to get started with a credit history.
Get a prepaid debit card. If you’ve got problems with no credit but would still like to use a card to manage your expenses, you may want to opt for a prepaid debit card. These cards are convenient to use but are tied to an account you establish with an amount that is equivalent to your card limit. There are debit card issuers that may pass your records over to the credit agencies, but there are those that don't. There are no guarantees that you will be building credit if the card you're using is a prepaid debit or reloadable card. We advise you to read the fine print to know if you will indeed gain points for establishing credit with the use of these cards.
Get a "bad credit / no credit" card. This is a less desirable option than a secured credit card, but if you lack the funds needed to establish a savings account for a secured card, you can open an unsecured credit card account with a card company that specializes in lending to people with bad or limited credit histories. The drawback to this type of card is that the limit is generally set very low and the interest rates are high, making this one of the more expensive methods for establishing credit.
Get a personal loan. Although getting a personal loan is not quite the same as obtaining a credit card account, establishing some payment history through a personal loan will help you obtain a credit card in the future, as long as you make your payments promptly each month. This option is usually less expensive than an unsecured credit card.
Developing good credit habits from the beginning is the key to creating a sound and secure financial future. While getting your first account can be tough and considerably more expensive than future credit accounts, it is well worth the effort. After a few months of making timely payments, you'll eventually be able to upgrade to a credit card with a higher limit and less expensive interest.