You’d think creditors would be impressed by someone who has never had any debt. But crazy as it may seem, that’s not how it works. You’ve got to have some positive credit management history on your side to get two thumbs up. You certainly don’t have to be “in debt” to create a great credit history but you do have to be in the game.
If creditors aren’t knocking at your door, or they’re turning you away from theirs, here are some strategies to build the all-important credit track record—without accumulating debt.
Just Say Yes!
You’ve probably been asked hundreds of times if you’d like a 10 percent or 20 percent discount on a purchase by applying for a store charge card. My first response (and I think the most appropriate) in most cases is a firm, “No, thank you.” But if you’re trying to get your foot in the “credit door,” say yes. Typically, these cards are easier to get than a normal credit card. Just be sure to pay the bill in full when you get it. Getting a gas card from your favorite station is an alternative on this strategy.
Same as Cash
The “90 days, same as cash” offers at big-box retailers are similar. The offer represents a credit line, which you should pay off before the 90 days expires. Be warned: A lot of folks get in trouble when the 90-day period expires and they’re hit with outrageous interest and double-digit rates moving forward. So this should be pursued only when you already have the cash on hand. The same approach works with a car you planned on buying with cash. Set up the financing, ensure there’s no prepayment penalty, then pay it off in full the following month.
Secured Credit Card
This is a real credit card that, unlike a debit card, will result in your timely payments being reported to the credit bureaus. Unlike a normal credit card which is unsecured—there is no collateral—a secured credit card requires collateral. Typically, this takes the form of a Certificate of Deposit (CD) held at the issuing bank. For example, you set up a $500 CD and the line of credit on your secured card will be $500. There’s no risk for the bank, because if you don’t make payments they’ve already got your money. After demonstrating your good habits for a period of time, you should be able to move on to a normal credit card.
If properly executed, these strategies represent opportunities to build your credit history without ever having paid a penny of interest. And, at that point you should be able to obtain a major credit card. Now, let’s look at one final thought as we’re discussing getting your credit history off and running in the right direction.
Bank of Mom and Dad
I’m not talking about turning back the clock and hitting your parents up for some cold hard cash. Instead, ask them for a helping hand by having them co-sign on a car loan or credit card. Their credit history and score will give you a chance to obtain a credit card and establish your own track record of excellence. Of course, mess this up by missing a payment or making one late, and you’ll be in trouble with more than the credit agencies because your parents’ credit scores will get dinged as well. You must be extremely diligent if you choose this path. Awkward silence at the holiday dinner table is never a good thing.