If you’re not qualified for a credit card or loan, try a secured credit card.
Yes, getting a secured card can help you establish credit. You simply give your bank money and they convert that money into a primary credit card in your name.
Most banks offer credit solely based on their belief that you will repay them (i.e. your “credit” worthiness). Whereas, banks offer secured credit cards based on the fact that you have “secured” future advances on the card with prepayment.
So, since there’s absolutely no risk, how does this establish credit? Well, you will make payments on the secured credit card just as you would on an unsecured credit card. The banks report your payment behavior to the credit bureaus.
Credit monitoring services, like FICO, use this information to generate your credit score. This usually takes about 6 months of payment history.
The downside to a secure credit card is that, unless you have a lot of cash laying around, you typically open a small secured card. That places you in a more adolescent bracket, in terms of credit scoring.
That is a concept deserving of its own article. Suffice it to say, use secured cards to break the mold.
But, you’ll eventually want to get into unsecured cards for maximum credit enhancement potential.
If secured credit cards are insufficient, try credit builder loans.
Credit builder loans are perfect for those just getting into the credit game. The good news is that you do not need to have good credit to get approved. The possible downside is that you need to prove you have enough income to make payments.
Another possible downside is that if you are already in debt, credit builder loans may not be enough to help you. Studies have indicated that these are best for people who have no debt history and are brand new to credit.
Credit builder loans can also be somewhat hard to find. They are usually offered by smaller establishments like credit unions or community banks.
Once you are approved, the money is held by the establishment until you finish making payments. In this way, there is very little risk to the bank.
While you make payments, the money accumulates as savings. Your payments are then reported to one or more of the major credit bureaus.
Once again, loans can backfire if you’re not prepared to make payments on time. Negative items on your credit report, such as late payments and overdue balances, will affect your credit score adversely. It can take a significant amount of time and effort to reverse.
Always exercise caution before committing to any kind of loan.
The latest trend… self-lending.
There has been a proliferation of self-lending companies in recent years. This is due to a gap in the market where certain people were considered “unscorable” by credit reporting bureaus. As a result, businesses found ways to create products to start scoring people.
The idea of self-lending is somewhat similar to a savings account. The difference is that it allows you to build credit and savings at the same time. Rather than receiving the loan upfront like in most cases, payments are made in installments. Once the loan is paid off, you receive access to the funds.
This is a relatively risk-free way for creditors to lend to consumers with little to no credit history. The consumer benefits by having the information reported to the three major crediting bureaus.
Convert your utility bills into credit and benefit from on-time payments.
Typically, utility bills only significantly affect credit scores if payments are made late or the account is delinquent. Paying your utility bills on time, however, typically won’t cause your score to go up. If you regularly make on-time payments for rent and utilities, there are ways to add these items to your credit profile so that you can reap the benefits of an increased credit score.
By opening an account with Extra, you are essentially paying to have them facilitate a connection with each major credit bureau. In turn, your payment information gets reported and added to your credit profile. The Extra debit card acts like a credit card, and as long as your payments are on time, your credit score will go up.
The benefit of Experian Boost is that it is free and works fast. The downside is that the positive increase is only reported to Experian. That means that if a lender pulls your report from the other reporting agencies, the boost from Experian won’t help.
Lastly, if you are a renter, you could ask your landlord to report your monthly payments. Landlords typically don’t report rental payments because there is a fee to do so. You could always offer to pay the fee for them if they are not willing. However, if you have to pay to do this, there are typically better ways to make the most of your money, such as the methods we mentioned above.