If all else fails, consider getting a secured credit card or getting someone to cosign on a credit card. If you choose carefully, these cards can help build positive credit history. But not always -- so be sure to shop around, ask questions, and check the terms. However, even if they don't help build credit, at least you'll have that piece of plastic if you need to rent a hotel room or pay for a small emergency.
Secured Credit Cards
To get a secured credit card, you open and maintain a savings account which serves as security for your line of credit. If you fail to pay your credit card debt, the bank uses the money in your account to cover the charges. Usually, your credit line equals 100% of your deposit, but sometimes it is less.
Use your secured credit card to make small purchases and pay the balance off each month. If you pay on time for a year, it usually helps build credit. At that time, you can apply for an unsecured card.
Here are some things to keep in mind when shopping for a secured credit card.
Secured credit cards are expensive. Unfortunately, banks often charge an annual fee as well as large application and processing fees for secured credit cards. And the interest rate is high -- usually between 20% and 30%. At the same time, the interest rate you earn on your deposited money is often only 2% to 3%.
Check for a grace period. Some secured credit cards eliminate the grace period so that interest on your balance begins to accrue on the date you make a charge, rather than 25 days later. (To learn more about grace periods, see Nolo's article Shopping for Credit Cards.) Without a grace period, you pay interest even if you pay off the balance in full each month.
Get a card that will establish a credit history. Some creditors don't place much weight on credit history established by a secured card. And others, especially smaller issuers, don't report to the three major credit bureaus. Ask the issuer if it reports to the credit bureaus -- most major banks do.
Look for a card with a conversion option. Some secured cards allow you to convert to a regular credit card after several months or a year.
Cosigned Credit Cards
Credit card companies will almost always issue credit cards to people with bad credit if someone with good credit cosigns or guarantees the application. A cosigner on a credit card agrees to be fully responsible for the debt. A guarantor agrees to pay the debt only if the primary signer defaults. Make sure the credit card company reports payment information to the credit bureaus for your report, not just that of the cosigner.
Your New Credit Card: Manage it Well
Once you get a credit card, continue to build credit by managing your card and debt well. Here are some tips:
- Sign your card as soon as it arrives.
- Keep PIN numbers in your head.
- Keep a list of the credit card issuer, account number, and issuer's phone number in a safe place. That way, you can quickly call to report a lost or stolen card.
- Inform the credit card issuer if you change addresses.
- Don't give your credit card number to anyone over the phone unless you placed the call and are certain of the company's reputation.
- Pay your bill on time every month. If possible, pay off the balance each month. (For more on keeping your debt under control, see Nolo's article Avoiding Credit Card Debt.)
For more information on credit cards, your credit history, and how to get out of debt, get Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard with attorney Margaret Reiter (Nolo).
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