Did you know one in five consumers in the United States have no credit history at all?
If you’re one of these people, you certainly know the consequences. Difficulty getting rental applications approved, taking out loans at higher interest rates, and paying higher deposits on utility services are some of the negative effects of being credit-invisible.
The only way out of these troubles? Build a credit record.
Ready to get started?
Keep reading to learn how to establish credit and kick start your journey to financial wellness.
If you’re in college, you’ve got a good opportunity to start building a credit record. All you need to do is take out a federal student loan.
Lenders of federal student loans don’t consider an applicant’s credit score, so you’re sure to get approved. Once you start repaying the loans, you’ll start racking up a credit record.
While federal student loans are ideal for building credit, don’t feel pressured into applying for them just for the sake of your credit history. If you’re lucky enough to get a college education without taking out loans, by all means, don’t. You don’t want to graduate with debt and spend most of your adult life repaying it.
In most instances, rent payments don’t show up on your credit report. However, there are steps you can take to ensure your effort as a tenant reflects on your report.
RentTrack and Rental Kharma are examples of services that track rental bills and help tenants build their credit scores. If you’re a tenant, don’t let this opportunity pass. Sign up with a rent-tracking service of your choice and let it do the heavy-lifting for you.
There’s a catch, though.
Missing your rent payments can hurt your credit record. If you sign up with a rent-tracking service and then you start making late payments and missing others, the record will show.
Your landlord can also turnover your rental account to a debt collection agency. The agency will try to get you to pay up what you owe, but if you don’t budge, they will report your details to a credit bureau.
Needless to say, your credit score will take a tumble. The last thing you want is to move from no credit to bad or poor credit.
Before the Financial Crisis of 2008, it wasn’t unheard of for a credit-inactive person to secure a personal bank loan without facing any major hurdles. As long as you maintained an active bank account, you stood a chance of getting approved for a loan amount relative to your transactional volume.
But then the crisis happened and banks tightened their noose for borrowers. Today, it’s difficult for a consumer with no credit to get a bank loan unless they have a co-signer or collateral.
Think of a co-signer as someone who vouches for you. When you apply for a personal loan, your co-signer agrees to take up all the repayment obligations in case you default. The loan also shows up on their credit history.
Banks look at the co-signer’s credit score and income. If it’s less than satisfactory, they’ll reject your application.
Considering the risk co-signers have to bear, it’s fair to say finding one can turn out to be a challenge. You not only must find someone who believes you won’t default on the loan, but also a person with a good credit score and a steady income.
Some banks offer secured personal loans.
To qualify, you need to put up collateral that’s at least as valuable as the loan amount you’re seeking. This is to say, if you need a $1,000 loan, you have to present an asset with a present market value of at least $1,000. Most lenders will only approve you for about 80 percent of the item’s value.
So if you have no credit and own a valuable asset, you can use it to get a secured personal loan from your bank. Before applying for the loan, ensure you’ll be able to service it fully and on time.
If you default, you risk losing your asset and ruining your tender credit record.
Secured credit cards work like secured personal loans, only that the collateral is a cash deposit.
Remember, getting a regular credit card with no credit is hardly possible. But if you’ve some cash lying around, use it as a cash deposit to get a secured credit and start building your history.
And, because the card’s credit limit is usually equal to the cash deposit, you don’t need a lot of money to get started. A $100 cash deposit can get you a secured credit card with a $100 limit.
Do you have a job with a steady salary?
Yes? Awesome! You can get a payday loan and use it to build your credit. The loan will be paid into a bank account or any qualifying bank card, such as a prepaid debit card.
These loans are typically repayable by your next payday and carry exorbitant interest rates. Evaluate your options accordingly before applying.
As the name suggests, credit builders are designed for people with bad or no credit.
Community banks, credit unions, and some emerging online lenders are the typical providers of these loans.
Here is how they work:
You apply for the loan, say $200. The lender holds the money in an account and only releases it to you after you fully repay it. The lender will report the repayments to credit bureaus.
No one is born with a credit history. We all have to take steps to build our credit records, which enhances our chances of access crucial financial and utility services affordably.
With this how to establish credit guide, you now have the information you need to move out of the no-credit zone. Regardless of the methods you choose, remember consistency is the key.
Keep tabs on our money section for more tips and insights.