How to Establish Good Credit With No Credit

Credit & Debt, Living & Spending
on May 25, 2012
One of the most important aspects of getting started on the right foot in life is to establish good credit. Having good credit from the very beginning of your credit history can literally save the average person hundreds of thousands of dollars over a lifetime because of lower interest rates on large asset purchases (houses, cars, speedboats). However, it may seem difficult to establish credit without having credit. Many institutions such as some automobile dealerships will only deal with people that have a prior credit history. Many of these institutions seek to charge a premium to new credit seekers, claiming that they are a higher risk to the company somehow. This may frustrate some initial credit seekers, but there are actually many other ways in which new credit seekers can create a credit record safely for themselves.Below are some of the ways in which you can establish good credit with no credit. One – Get a prepaid credit / debit card.

Make sure that you get the correct definition of the card that you are getting from the underwriting institution, because in some instances, you want a “prepaid debit card” and in others, it is called a “prepaid credit account.” Regardless, what you are looking for is an account that issues you a card and that draws only on money that you have deposited.

Contrary to popular belief, these types of accounts are actually monitored by the credit rating agencies as full credit accounts. Getting an account that can only draw on money that has been previously deposited gives you some very interesting and savvy ways to safely build credit.

For instance, if you have the opportunity for direct deposit into the prepaid account, you can set up your bills to be paid automatically and build your credit literally with your eyes closed. Just make sure that the amount of money going in to the account is greater than the amount coming out. Because your bill paying history is one of the top criteria that the credit rating agencies use to determine your initial credit score, you can pay your bills, build a credit history and protect your financial records all at the same time.

You can also make other purchases on a prepaid account and pay it back over time to build credit history. However, this technique leads to the next strategy that you can use.

Two – Use zero interest retail credit cards to make purchases of clothes, etc.

Many retail stores will issue you a store credit card that is actually underwritten by one of the big credit card companies. Ask the sales representative or look on the card for the logo of one of the recognizable credit card companies.

These retail credit cards are followed by the major credit rating agencies and give you the opportunity to build your credit history while buying things that you need. To give the technique the best chance of working, pick credit cards that have a zero interest period and pay off the purchases within that time. Otherwise, you start paying interest. Although if you keep up with these interest payments you will not hurt your credit score, at this point you are paying money that you do not have to pay just to build your credit score.

Watch the balance that you carry and make sure that you do not go over the time period of the zero interest period. Do not rely on the minimum payments that are given to you by the statements coming from the retail store. Many times they will make sure that the minimum payment is not enough to cover the full price of the item, guaranteeing the store a free profit from the interest rate payments as well.

Three – Take a major loan with a low monthly limit.

You can purchase a large asset like a car with no credit; you just have to do a little searching for the best deal. As a rule, if you finance with the auto dealership or with the large, multinational banks, you will end up paying more in interest if you come in with no credit. To underwrite your loan, look for smaller state or regionally based banks, or even a locally based credit union. They are much more used to people coming in with no credit and they will have programs set up especially for you.

Again, you can keep your interest payments to a minimum by making the payment automatic and making sure that you pay off the entirety of the loan within the introductory period of the loan. Many times this is not possible with a large asset purchase such as a car. However, you can still search for the lowest interest rate and terms that say that the interest rate will not go up after a specified period of time. Read the fine print. This is something that you absolutely must make a habit when you start talking about loans.

Four – Get a cosigner.

If any of the above solutions are somehow out of your reach, you can always get a cosigner on a loan to build your credit. A cosigner means that the financial institution will consider that party responsible if you can not pay for any reason.

Because of this cosigning is one of the quickest ways to ruin a friendship if you ever lose a job and can not pay off a large loan. This strategy is definitely not the priority, but it is one to consider if you can not afford any of the other strategies.

Keep in mind that financial institutions perform probability calculations for a living. The reason that any institution would require a cosigner is because they do not expect you, mathematically, to pay back the loan. They expect to have to knock on your cosigner’s door. If a bank requires a cosigner, you may want to take their research into consideration for your own life and reconsider your loan options – perhaps after you begin making more money.

Five – Monitor your credit and learn how to check your credit score with the major credit rating agencies.

The credit rating agencies have been known to make mistakes on credit reports. Learning how to monitor your own credit is definitely one of the aspects of building your credit. Make sure that you know how to get your hands on your one free credit report per year. Avoid the commercial companies that want your information. Get the report for free from the agencies themselves.

There is a difference between your credit report and your credit score. You can always get a free credit report once a year. However, you will most likely have to pay for your credit score. Make sure that you know it before you go into any loan office.

If you are making a big asset purchase like a car, they will most likely ask to check your credit score for their own records. If they will not accept your records, then make sure that you go to all of your potential dealerships one after the other. A third party checking your credit records does decrease your score slightly every time it happens unless it happens in quick succession.

Also, they will usually try to make you pay for this credit check. Some will try to make a profit off of the transaction (it should not cost more than $30). If you can not negotiate it into the price of the car, then do not go through with any transaction that they make a profit on. If they try to fleece you for a couple of dollars, what do you think they will do with the tens of thousands of dollars you are about to spend on the car?

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