We’ve all met that strange family member or colleague who lives entirely on cash and has never used a credit card or borrowed money. They’re fiercely self-reliant, and they believe that not owing “the man” has made their lives better. Nobody wants to have a poor credit rating. Is having no credit at all, however, truly a smart idea?
Exactly Why Do You Need Credit?
Even if you want to pay “cash on the barrel” and have no intention of borrowing much money, building credit is crucial. Credit building, on the other hand, might have ramifications that go beyond borrowing. That’s why, even if you don’t think you need it, you should focus on strategies to improve your credit. When you apply for a job, for example, one of the variables that will be looked into is your credit. Credit reports on job candidates are now commonly requested by employers.
It’s possible that a blank credit report won’t hinder your chances of being hired. However, there are times when it may be necessary. You’ll also need strong credit if you want to rent an apartment. Your complaint will be investigated by the landlord or unit manager. They may be hesitant to rent to you if you have no credit history. Another instance is when you submit an insurance application.
Credit reports are pulled by both life and vehicle insurance providers on a regular basis. This is done not simply to see if you’re a good fit for the policy, but also to figure out how much your premium will be. Finally, you may need to apply for credit at some point. It could be a mortgage to buy a house, an auto loan to buy a car, or just a credit card to make online purchases or travel internationally.
How to Build Credit When You Have No Credit
There’s a bit of a catchy situation here. You must have a credit history in order to obtain credit. It’s far more difficult to get credit if you don’t have that background. You can’t build a credit history if you can’t acquire credit. So, what’s the greatest approach to develop credit if this is your situation? Fortunately, if you employ the appropriate tactics, there are several ways to establish credit that can benefit you.
1. Apply for a Credit Builder Loan
This is a type of loan that is specifically developed for people with bad or no credit. It’s an opportunity to establish or improve one’s credit rating. Credit builder loans operate by giving you a loan that is totally secured. What if you don’t have any collateral to back up the loan? It’s no problem! The loan amount and security for a credit builder loan are the same. The lender will provide you a loan, say $1,000, and the money will be deposited in an interest-bearing savings account that will act as collateral for the loan. You won’t be able to access the money in your savings account until the loan is paid off completely.
Repayments can also be made by direct debit from a savings account. Your payments will be made automatically in this method, ensuring on-time payment. The savings account will be completely depleted by the time the loan is fully repaid. You’ll also have to pay a portion of the loan’s interest out of pocket. The lender will still record your on-time payment history to all three credit bureaus, even if the payments are automatic. This will provide you with a good credit rating as long as the payments are made on time and the loan is paid off completely.
It will then appear on your credit report as a paid loan, which is a huge bonus for your credit score. To be qualified for a credit builder loan, you don’t need a credit score. Banks, particularly credit unions, are the most common providers. To qualify for the loan, you must first open a checking account with the institution. If you use a credit builder loan, it will take several months – usually six to twelve – before you start to improve a credit score. And, of course, after the loan is paid off in full, your credit score will skyrocket.
2. Apply for a Loan With a Co-signer
Apart from a credit builder loan, getting a loan on your own will be extremely tough. However, if you apply with a co-signer, you may be able to qualify for several sorts of financing. When lending institutions provide loans, they assess the likelihood of repayment. They won’t be able to authorize the loan if you have no credit. After all, you won’t have any credit history to show that you can manage credit well. However, if you can find a co-signer with a good credit history, the same lender may be willing to approve your loan. Installment loans, such as auto loans, are the greatest candidates for this strategy.
Installment loans are significantly less hazardous because they are often secured by collateral. It’s possible that adding a co-signer is all that’s required to receive permission. Even if you do find a co-signer, be sure you keep up with your payments. If you miss any payments, it will affect not only your credit score but also the credit score of your co-signer. In the event that you default on the loan, your co-signer will be responsible for repaying it.
Not only will this impact your credit score — as well as that of your co-signer – but it will also harm your relationship. A co-signer loan, like a credit builder loan, must be in place for several months before you begin to see benefits in your credit score. However, this is one of the most effective strategies to establish credit, so be patient and make all of your payments on schedule.
3. Become an Authorized User
This isn’t as effective as credit builder loans or getting a co-signer on an installment loan for building credit. It can, however, be a useful strategy to establish credit. The method is most effective when used with credit cards. The applicant and owner of the credit card account are two other parties. The credit and income of the applicant are used to determine eligibility. However, he or she adds you as an authorized user on the card.
That is to say, while you have permission to use the credit card account, you are not responsible for the payments. An authorized user account can appear on your credit report and have a favorable impact even if you are not obligated to make the payments. This is especially true if you have additional loans on your credit report that are in excellent standing.
Building Credit: Credit Cards for People With No Credit
Even in a discussion about how to establish credit, I hesitate to include this category. That’s because, while it has the ability to help you develop credit, it comes with a lot of strings attached. You’ll have to measure the drawbacks against the advantages of these cards.
Secured credit cards
Secured credit cards are usually the better option of the two. They offer cheaper fees, you’re generally dealing with well-known banks, and their interest rates and levies are reasonable. Of course, the biggest disadvantage of secured cards is that the amount of your security deposit determines your credit limit.
They function similarly to credit builder loans, with the exception that you cannot use the loan to secure a credit line. Your credit limit will be $200 if you only have $200 available. At today’s prices, that doesn’t purchase a lot of buying power. Even if you have a higher sum to pledge as security, such as $2,000, you will lose access to your savings account money.
Unsecured credit cards
Unsecured credit cards have the advantage of not requiring you to put up collateral to obtain the credit limit. However, that is about their only advantage over secured credit cards. Unsecured credit cards usually have limited credit limits, to begin with. Expect to pay no more than $300. However, the fact that they charge exorbitant annual fees just adds to the problem. In the first year of owning the card, for example, a typical agreement is a $75 yearly fee.
It then goes up to $99 each year after that. It’s terrible enough that the cost is so expensive. It’s made worse by the fact that it’s deducted upfront. Let’s imagine you have a $300 credit limit, to begin with. If there is a $75 yearly fee, it will be withdrawn from your credit limit immediately. That leaves you with only $225 on your credit card.
It’s true that establishing credit from scratch might be challenging. Start with credit builder loans or apply for a loan with a co-signer if you want to get the task done as quickly as possible. If you’re a student, student credit cards are a great option. Adding yourself as an authorized user on someone else’s credit card can assist.
If everything else fails, secure and unsecured credit cards should only be used as a last resort. Finally, use patience. Building a solid credit report can take a year or more. Open new accounts in small increments, pay all bills on time and give the plan plenty of time to work.