One of the biggest problems many consumers who don’t have a borrowing history but want to start establishing one may run into is that lenders simply aren’t willing to extend them credit.
Even as the recession’s effects recede and lenders become more willing to extend credit to borrowers who had defaulted in the past, consumers who don’t have an established credit history of their own – particularly those who are young adults just beginning their lives as financially independent people – might still be having trouble getting a card in their name. Fortunately, there are a few workarounds to this problem.
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The first is for the credit hungry to simply find an adult co-signer with a good borrowing history who can help obtain a card for them. Of course, this comes with certain responsibilities that new borrowers may not consider. For example, co-signers are just as responsible for the debts on the new card as the person who’s actually using it, meaning that a late payment or a default will have a negative impact on their credit score. The upside, though, is that by having a co-signer with a strong credit history, new borrowers can also get cards with more affordable terms.
Another possible option for new borrowers who want to build their own credit history is to get a secured card.
These accounts are available to anyone, without a credit check, and are established by making a down payment, usually of a few hundred dollars, to the lender as a means of establishing the account’s credit limit. Of course, not all secured credit cards are the same, and some don’t report to the credit bureaus, meaning borrowers will have to make sure the account they’re getting will help them build a credit history in that way.
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However, secured cards usually have higher credit limits than unsecured cards, and many also carry annual fees, so new borrowers may want to use this type of account as a kind of introduction to card use, and not an account they rely on once they’ve established a credit history.
As with any other consumer, new borrowers should be prepared to keep their balances as low as possible and make all their payments in full and on-time to maintain a strong credit standing.
Image: Diego Torres Silvestre via Flickr