One of the great paradoxes one discovers after graduating college is that, in almost anything you do, you need experience to get experience. To land that great writing job, you need three years of writing experience; to get approved for the auto loan you need to buy that new car you need to have established credit-worthiness; to get credit, you have to already have it.
This is a puzzling fact that at first seems impossible to circumvent — how are you supposed to get credit if you have to have credit in the first place? Where does the credit come from?
If you’re looking to build your credit up from nothing, follow these steps to escape the paradox:
1. Know Thyself (Or at least Thy Credit Report)
There is a chance that one of the three major credit bureaus have tracked some of your activities and recorded them on your credit report. Credit bureaus generally track things like payment history on credit cards or loans and other account activity, but have recently included things like rental payment history, so it’s possible that you’ve established some credit without even knowing it.
Another reason to check your credit report is to find any possible inaccuracies. Obtain a copy and examine it for errors. If you find any, report them, and your score might improve.
2. Do Some Digging
While standard credit building options such as credit cards or mortgage loans might be out of the question for you, there is a good chance that you qualify for other opportunities:
Secured credit card: Credit unions and some banks offer what is called a secured credit card, which is a credit card attached to a savings account and secured by an initial deposit. If you deposited $500, for example, you would get a card with a $500 limit. Any time you use that card to buy something, it’s like borrowing from yourself, and you will just pay yourself back later. This is a great option because banks aren’t liable if you don’t make payments on time, so they are usually very willing to open an account for you. Still, no matter what kind of card you have – make your payments on time always.
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Retail or gas credit cards: Credit cards issued from retailers are often easier to get and work the same way as standard cards, but often have much higher interest rates, so it is imperative that you pay your balance in full each month to avoid being charged too much interest.
Co-signing: If you a student (or even if you’re an adult) another great alternative is to get another person with more credit-worthiness than you, such as a parent or mentor, to co-sign on a low-limit card. This puts them at risk, though, so it is your responsibility to them and to yourself to make your payments.
3. Use It or Lose It
After you’ve secured some credit, it is important that you actually use it. The key here is to use your credit card on things that you purchase anyway, like gas or groceries, and then pay it off in full each month. Every time you make a purchase and then pay it off, a report is sent to the credit bureaus, reflecting positively on your credit report and score.
Ideally you should open more than one account, and keep old accounts open, just to show that your credit usage is diversified, and that you are a responsible borrower.
It may take a while, but your credit score and strength will increase over time as you build up your credit following the steps outlined here, and sooner than you know it, you’ll be on your way to a score of 800.