How to Get Credit When You Don't Have Any

There are few things in life that are more frustrating than trying to figure out how to get credit when you don’t have any. It is like being caught in an endless cycle.

You can’t get credit because you don’t have any. You don’t have any credit because you can’t get any.

One special thing to note is that if you are a college student, there will never be an easier time to establish your credit. Banks and lenders are banking on your future earning power, and are eager to establish a relationship with you. Just make sure that you are emotionally ready to handle credit – I have seen way too many people end college with thousands of dollars in credit card debt.

Fortunately, new laws that impact credit card companies ability to target people under 21 are now in place.  Learn more!

For the rest of you, read on so you can find out how to get credit when you don't have any!

Before we look at how to get credit, let’s discuss why you need credit.

Like it or not, credit is part of life. Whether you have good credit, bad credit or no credit will impact your financial life. And, we all know that your financial life will have a huge impact on everything else!

Lacking credit will have a significant impact on your ability to build wealth because you must have credit to buy a home. For most people, their home is their single greatest asset. The average disparity in net worth of homeowners versus renters is $363,800, for those with incomes over $80,000. Even with an income of just $30,000, the net worth gap is still $115,900. Take a look at the chart below and it is clear that owning a home is critical to your ability to build wealth.

In addition to this, credit impacts more than just your ability to buy things. Without good credit, you may find it difficult to obtain certain types of insurance. Even your job opportunities may be limited, as most employers pull your credit prior to hiring you. This is not an issue if you are young, but if you are 35 not a single credit reference, it can appear suspicious.

Even if you don’t have experience with credit, you probably know that your credit score is important. It is one of the single greatest factors that will impact your ability to obtain credit.

So what are you working for? What is a Good Credit Score?

According to Fair Isaac, the median score in the United States is a 723. Having been an underwriter for almost 10 years, I doubt that it is truly this high, but that is what they say!

In reality, anything a 700 or over is good credit score. You will have access to most any type of loan with a credit score this high. There are a few products that may require a truly exceptional score of 760 or more, but for the most part, as long as you have a score in the 700’s, you will have options.

Once you drop below 700, your credit is considered to be fair. (This has not always been the case – a few years back you could do most anything you wanted with a 660 and that was considered a good credit score by most lenders.) If your score is between 620 and 700, you should still be able to qualify for loans, but you will want to look for ways to improve your credit score.

So, what is a poor credit score? When do your options start running out?

There was a time when you could buy a home with a score in the 500’s, but that time has passed. As of March 2009, even FHA requires a minimum score of 620. With the fall of Sub-Prime lenders, anything below a 620 will seriously limit your options.

I would consider anything a 620 or under to be a poor credit score.

There are quite a few options for those wanting to learn how to get credit. The important thing to remember is that for the best possible score, it isn’t enough just to have one credit trade line, or even multiple accounts of the same kind. You will want to establish at lease four different accounts, and you will want to have a mix of the type of accounts. This means you will want to have both installment loans and revolving accounts.

The Best Place to Start

Your bank or credit union can be the best place to start, especially if you have an established account with a good history.

First you need to look at your situation. Do you have a bank account? If not, obviously this is the first thing you need to establish.

If you do have an account, how have you handled it? You need to be honest with yourself. If you have had a series of NSF checks, you may want to consider starting a relationship with a new bank and treating this relationship much more carefully. While your returned checks won’t appear anywhere on your credit report, they are in the banks internal system, and may limit the banks willingness to give you a shot at credit.

Assuming your account has been handled well, it is time to build a relationship with your bank manager. While it is true that guidelines are typically fairly defined, do not underestimate the ability of relationships. I have worked for major banks and while I did not always have the authority to approve a loan, I can tell you that there were many times when I fought to get something done for someone, just because we had a relationship.

If your branch manager doesn’t know you, I would go in and introduce yourself. Be honest and explain your situation. If you are fairly young, there obviously won’t be much to explain. But if you are older, let them know why you don’t have a credit file. (i.e. I married young and just never established credit, I had a bankruptcy 12 year ago and was so scared of credit I just never got any) Ask what you would need to do to be approved for a loan.

Based on your relationship with the bank, you may be able to get a very small loan with no collateral. If you can, this is a huge win!

If you can not, there are several other options.

Is there a Credit Union that you could join? They may have more lenient criteria and be more than happy to work with you.

If this doesn’t work, you will want to get a CD loan. This is where you open a CD at your bank and they issue you a loan in the same amount. The bank is more than happy to do this 99% of the time, because they are completely collateralized.

Even though it may seem counter-intuitive to pay interest on you own money, this is a solid strategy to get credit when you don’t have any. Sometimes you have to “buy” credit.

Most People Don’t Know You Can Get Your Landlord to Report to Your Credit Bureau!

Most people think that if they don’t own a home, there is no chance of getting credit for their monthly payment on their credit report. This isn’t true!

Did you know that your landlord can report your monthly payment to your credit report?

Most people don’t know this, and it is a great way to build credit! Yes, it will cost you some money. But the credit you will build is worth it! For more information, visit the websites below.

Getting Accounts Added to Your Credit History

Obviously you want as many positive accounts as possible reporting to your credit file.

But what can you do if you have accounts that are not reporting?

The first step is to call the creditor and find out why. Sometimes they will report your account to the credit bureau just because you asked. (Don’t count on this however!)

If this is not effective, you will need to deal with each of the three credit bureaus directly. You can either contact them online or call them. Tell them you would like to report an omission.

The credit bureaus will attempt to verify the information. It is very helpful if you can provide them with documentation, such as original loan documents, account numbers and proof of payment.

With any luck, you will have new positive credit on your report within a few weeks!

Piggybacking Isn't Gone...There are Just New Rules!

For years, a very common way to establish credit was to get someone to add you to their existing credit card as an authorized.

Obviously, one of the key advantages is that instead of opening a brand new account with no history, you now have an account that has been open for years with a positive history. A 10 year track record of being paid on time is obviously huge which is why this is one of the best ways to establish credit.

The problem with this strategy is that disreputable credit repair companies abused it! They were having people pay large sums of money to strangers to become an authorized user on their accounts.

Because of this abuse the laws of piggbacking were changed in 2009 with the roll-out of FICO 08. (Yes, FICO 08 didn’t come out until 2009! It was slowed down due to a lawsuit filed by Equifax.) Now, the only people that can add you as an authorized user are your parents or a spouse. Still, if this is an option for you, becoming an authorized user is a great way to establish credit. Just make sure you pick an account with a low balance and a perfect payment history!

Store Cards and Gas Cards!

Other great places to start with credit that is often overlooked are department store cards and gas cards.  Lenders tend to have more lenient requirements here because they (obviously) want you to buy their goods.  It’s no secret that the easier they make it for you the more likely you will be to purchase from them.  So, while this is a good strategy, you should only use it if you have a great deal of discipline.

Co-Signers

If you have someone willing to co-sign for you, this can be another great way to establish credit.  My dad signed on a car for me when I was 21 and a senior in college.  He helped with the payments until I graduated, and I took them over a few months later once I had a job.

This worked for us for several reasons.  One was that he had taught me to pay my bills on time.  I had enough respect for him to know that even if I had to get a part time job, paying my car payment late wasn’t an option.  From his perspective, I am sure that before he signed on the note, he looked at his personal situation and knew that if he had to, he could have made the payment and protected his credit. (Thank God he didn’t!)

Just like borrowing from family can cause troubles, having them sign for you and put their credit at risk can do the same.  For this reason, make sure everyone has a clear understanding of expectations and that both parties go into this situation with their eyes open.

Having a clean credit report is obviously your ultimate goal.  Why go to the trouble of establishing credit if you do not plan on keeping yours perfect?

As you begin establishing your credit file, you will want to create a good budget.  Be careful not to over extend yourself and to make your payments on time each month.

Make sure you understand the terms of your credit card agreements and that if you are planning on paying in full each month, you know when your payment has to go in to avoid an interest charge.  If you are carrying a balance, try to keep it under 30% of your overall credit limit.

You will want to monitor your credit report regularly by looking at your credit report at least once a year.  You can go to www.annualcreditreport.com, to get a FREE copy of your credit reports. (This is the only government sponsored source for your free annual report.) Unless you are trying to get your credit score or are interested in monitoring your credit more closely than once a year, this is the place to get your report.