As an individual, it is extremely important to understand credit scoring to help achieve financial success. Typically, it is difficult to attain a line of credit or a loan without establishing a robust credit profile first. Those with limited credit, who do gain approval for a credit card or loan, can find themselves paying much higher rates and pricing due to their higher risk of default.
But how do you build credit, when you don’t qualify for credit?
1) Apply for a retail credit card.
Retail credit cards are more easily obtained than any other form of credit. The downside to retail credit comes in the form of high interest rates and a low limit. If you do decide to go this route be sure to pay off your balance monthly, otherwise, retail credit cards can get very expensive. A retail card can be a great vehicle to developing credit history because retailers report directly to the three credit bureaus.
2) Become an authorized user.
With permission from the primary card holder, you can become an authorized user on their account. This can be very helpful in building your credit worthiness, especially if the primary card holder has a longstanding credit history, timely payments, and a low balance (about 10% of the credit limit available). It is important for you to understand that while becoming an authorized user can reflect well, it does not help your score if there is no primary credit in your name. Any credit card other then American Express is a good pick for authorized user credit.
3) Apply for a credit builder loan.
A credit builder loan is a small loan extended to an individual by a credit union. The amount allotted is usually between $500 and $1,000 and the term to pay off the loan is typically no longer than a year. The credit union will take the money from your loan, and put it into an interest-bearing account. The sum accrued by the account will belong to you, but you cannot access it until the loan is paid in full. Your payments will be reported to the three credit bureaus and at the end of the term you will receive the dollar amount that was accrued on the account in full.
4) Be-come a co-signer on a loan.
This is much riskier than the other options and not recommended for someone just trying to build their credit history. There is a large amount of liability associated with this type of agreement and these loans can take decades to pay off. If you are considering becoming a co-signer it is important that you protect yourself – make sure both individuals have access for making timely payments and have an understand of the new debt-to-income ratio the loan will cause and how it may impact your ability to gain future financing.
5) Apply for a secured credit card.
There is the option to open a secured credit card, which are much easier to obtain than a standard unsecured credit card. The individual will be required to provide a deposit that will serve as collateral on their accounts credit line. Card issuers will report your account activity and payment history to the three credit bureaus, so be sure to keep your balances low and make timely payments.
As you can see, there are a variety of options available that are designed to help individuals establish and build a good-standing credit history. If you have any credit questions feel free to reach our Credit Experts at North Shore Advisory Inc.
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