You need a good credit score to get a standard credit card. But how do you show that you're responsible with credit if you don't have a credit score to get credit in the first place? Here's a plan that not only helps you get a credit score but also can help rebuild a low score.
- Ask someone to be your co-signer.
- Consider becoming an authorized user.
- Apply for a secured credit card.
- Look into a student credit card.
Ask for a co-signer
Your family, or anyone who you know and trust for that matter, can help you get started.
What does a co-signer do?
Getting someone with a strong credit score to co-sign a line of credit (a loan or credit card) is one way a family member can help you build credit from scratch. Theoretically anyone can be a co-signer but it's usually a family member, given the level of trust you need to share. A co-signer will be responsible for repaying the loan in full if you can't meet its terms. And failing to meet payments on time will hurt your credit score as well as theirs.
Get added as an authorized user
Another way to build or improve your credit score is by asking a family member with good credit to add you as an authorized user on one of their credit card accounts. When you are added as an authorized user on credit card account, the payment activity of the main account holder is reflected on the payment history portion of your credit score. The main account holder is held responsible for making payments, so the spending activity of the authorized user is usually monitored to prevent excess spending and encourage responsible use. A payment arrangement between the main account owner and authorized user can also be set up separately as the authorized user has no access to making payments toward the credit card balance.
How do you build credit as an authorized user?
Attaching your name to an existing line of credit means that each on-time payment for that account adds to your credit history, helping to grow your credit score. Many families do this for their teenagers, so that they're able to rent apartments and put their name on utilities when they get to college. A consistent history of on-time payments will still positively affect your credit score if you becoming an authorized user. If you don't need to make purchases with the card, you can still benefit from an improvement on your credit score over time since that payment history will appear on your credit report in addition to the main account holder's report.
Who pays the credit card bill: the account owner or authorized user?
The primary cardholder is the one who holds all the legal responsibility to make card payments on time, so it requires someone having great trust in you to want to add you as an authorized user.
Although you are able to make purchases as an authorized user, it is the main account holder's responsibility to make at least minimum payments each month and pay off the balance. Most credit card companies and banks do not provide the authorized user a way of making payments, so any payment arrangements or guidelines on responsible spending should be considered separately.
Applying for a secured credit card
How does a secured credit card work?
Without a credit score, lenders need some other way to ensure that their line of credit to you will be repaid. Collateral, in the form of a deposit of cash, is one way to satisfy a lender, because they will already have recourse to that deposit if you don't pay your credit card.
A secured credit card is essentially a prepaid line of credit. You provide the lender with a deposit equal to the amount of your credit card limit, and then use the card and pay it off like a regular card.
How do you apply for a secured credit card?
Applying for a secured credit card involves a cash deposit to serve as your credit limit. Many banks, credit unions, and credit card companies offer secured credit cards. Just make sure they are legitimate and report to the three credit reporting agencies. There may be some secured credit cards that do not report to the bureaus, so be sure to double check this with the issuer or bank before applying. Once you apply for the secured credit card of your choice, you may be provided a credit limit offer and will have to provide a cash deposit for this amount. This amount may range between $300-$500. Keep in mind that you may have to pay a maintenance fee, interest, and an annual fee in addition to the deposit, but you may find cards with minimal charges and interest throughout your research.
How does a secured credit card build your credit score?
Secured credit cards can help you create or rebuild a credit history since you'll have an opportunity to make consistent credit card payments. By regularly paying your secured credit debt, you're building up a consistent history of payment reports recorded by the three main credit reporting bureaus, Experian®, Equifax® and TransUnion®. The better your score, the more eligible you become for regular credit cards that don't need a deposit from you.
Applying for a student credit card
How is a student credit card different from any other credit card?
If you are under the age of 21, you'll be required to show proof of employment to the credit card company or bank through which you are applying to. Even a part-time job may help you qualify. Student credit cards may have more flexible acceptance rates of low or non-existent credit scores, but typically have lower credit limits than traditional credit cards. You could, however, apply for an increased credit limit once you start showing a history of on-time payments and keeping your credit card balances low. But with these lower degrees of qualification, you should expect lower credit limits, restrictive terms, and higher interest rates.
Student credit cards don't need you to put down a deposit, like secured credit cards. However, as this will likely be the first credit history to appear on your credit report, it's important that you don't extend your credit beyond what you can afford each month. Delinquent or missed payments will keep your credit score low, and that means you won't be able to rent apartments, and lease cars when you graduate. Student credit cards are good if you've already developed good budgeting and spending disciplines, and are confident that you can put aside the funds you need to pay your credit card bill each month. You may also need to show proof of enrollment at a two or four-year college or university.
How do you apply for a student credit card?
You need to be able to show that you're currently enrolled in a college or university to qualify for a student credit card. Although lenders are pretty competitive when it comes to the terms they offer on student credit cards, you should still do your research and get an exact list of terms offered on each, and pick the one that best fits your lifestyle.
Yes, you can build your credit score from scratch
A good credit score takes time to build up, but can be achieved through consistently paying your bills on time and keeping your debt low. You should also avoid applying for too many lines of credit while waiting for your credit score to improve.
No matter how new you are in your credit journey, understanding how credit works and developing a strategy can put a great credit score in your reach.