Get Rich Slowly has a great post this week entitled “How to Establish a Credit History Without Losing Your Shirt” and it focuses solely on secured credit cards. Basically, the credit line on a secured credit card is tied to a certain amount of cash collateral you put up. Unlike a debit card, this deposited money is not used for purchases or to pay down your balances. You still have to make monthly payments just like any other credit card, but if you default on a secured credit card, the card issuer doesn’t have to go through the trouble of harassing you via mail, phone and Madonna songs, they just keep your collateral. Because of the lower risk of losing money, credit card companies are much less selective when it comes to issuing secured credit cards than unsecured credit cards – which is good news for those of us with murky or nonexistent credit histories.
Secured credit cards are just one way to build your credit without sticking out your neck. I’d like to devote the rest of this post to some other ways to build your credit from scratch or shambles that you may not have thought of.
Borrow from Uncle Sam
One of the best types of loans you can get is a student loan. These loans have federally protected low interest rates and deferred payments until you are out of school. And, if you enroll in certain programs after college, such as Teach for America, you can be eligible for student loan forbearance or cancellation. At the worst, it’s a cheap loan that help builds your credit. At the best, it’s free money for your education. So skip over that Bank of America booth in the student union and go fill out the FAFSA. Now.
Though credit cards are sometimes referred to interchangeably as “charged cards” they are not one in the same. Charge cards differ from credit cards in that you can’t carry a balance from month to month. If you buy $500 worth of hair scrunchies in March, you’ve gotta cough up $500 when the bill arrives. If you don’t, you immediately default and are charged hefty penalties. The plus side: it will build your credit over time. Oh, and since there’s no monthly balance, there’s no monthly finance charge. There is, however, an annual fee. Read more about charge cards in our earlier post.
The banks are turning up their nose at subprime borrowers, but that doesn’t mean that no one is willing to help a brother out. If you’re having difficulty with credit card debt and want to build your credit, peer-to-peer lending can be a great way to kill two birds with one stone. Earlier, we reviewed Lending Club, a site that lets you to (potentially) get loans at interest rates in the 9.6% range for as little as $1,000. I tried it out myself and was surprised when my loan was “live” in a matter of hours and fully funded in three business days. But the best part is that Lending Club reports your borrowing activity to Experian, Equifax and TransUnion. As long as you pay off your loan in a timely fashion, your credit rating will go up.
Click here to sign up or learn more at Lending Club.
Become an Authorized User
Once upon a time, there was a thing called “piggybacking” where credit repair firms basically tacked you onto the credit card of someone with a good credit rating as an authorized user. Recognizing this as a way to game the system, FICO put the kibosh on this practice and stopped factoring in authorized users when calculating credit scores. But with FICO 08, Fair Isaac Corporation has devised a way to give credit rating benefits to “legitimate” authorized users while continuing to box out the piggybackers. This means that you can be added to a trusted friend or family member’s credit card as an authorized user and get a little bitty credit boost. But the key is you have to be a legitimate user. You have to be able to make charges and payments on a card opened by someone else. In most cases, this means actually carrying around a credit card with your name on it but the same number as the original user’s. To do this, just call up your credit card company and say you want to be added as an authorized user. I’ve done this recently and they ran a very quick credit check (asked for my SSN) and then shot me a card in no time. Because of the quick process, it’s pretty clear that the selection process is less rigorous than applying for a credit on your own.
These few examples of ways to build your credit without signing up for one of those arduous prepaid credit cards or “bad credit” credit cards with tons of fees and insultingly short leashes should help you safely and effectively work your way towards standard credit cards. We’d love to hear about any other methods that work – so let us know in the comments.