Picture this: You apply for your first credit card, excited to start building your credit with it. But then, it happens. You’re denied. The reason: Too little credit history.
Rejection has happened to most of us at one time or another. And credit card rejection is just par for the course when you have little to no credit history. But it’s not the end of your credit-building life. There are several things you can do to start building credit so you may not have to see the phrase “application denied” next time.
Keep up with cell phone and utility bill payments.
In most cases, instalment payments like your cell phone or electric bill won’t help improve your payment history. However, if you miss payments or your account is sent to collections, it could severely damage your credit. The same goes for rent payments; if you fall behind, you could be evicted, which will be reported on your credit. Whatever you do, keep these payments current, otherwise your credit score could take a hit.
Get a co-signer.
Since the CARD Act went into effect, it’s been more difficult for young consumers to gain access to credit cards. The reform forbids credit card companies from issuing cards to consumers under 21 unless they have a co-signer or can provide proof of ability to repay. This was good news because it kept credit cards away from younger, more vulnerable consumers. However, it also made it more difficult for the under-21 set to start building credit.
If you’re in a similar situation, find a co-signer. It can help you gain access to credit you couldn’t get on your own, since your co-signer’s credit score will be the one creditors look at to decide approval. But remember that you’ll be putting your co-signer and his credit score at great risk. If you fail to make payments on your card, your co-signer will be responsible for the debt. If you’re unsure of your own ability to make on-time payments, skip this suggestion for building credit.
Consider a secured credit card.
Secured credit cards are designed for consumers with poor or no credit history who want to start building their credit from scratch. Unlike unsecured credit cards, secured cards require a security deposit from you, which usually functions as your credit limit. Think of a secured card as credit card training wheels. It gives you the benefit of building credit without the risk of overcharging and being unable to pay back your credit card debt.
Most secured cards offer guaranteed approval, since they’re backed with your own cash. And many issuers will allow you to request a credit limit increase after a period of responsible use. Eventually, you may be able to convert your secured card into an unsecured credit card.
If you follow these guidelines, you should over time see the positive benefits to your credit score. Before you know it, you’ll be able to qualify for traditional credit products.
Bethy Hardeman writes on credit, personal finance and the economy for CreditKarma.com, a free credit management website that helps more than 6 million people access their credit score for free.