How do you establish credit when you need credit to get credit?

a male and female on college campus talking with each other on a sunny day

To establish credit when you have no credit is a challenge, but responsible use of a secured credit card is one of the best ways to get you started. Flickr photo.

Carving out your credit niche isn’t as easy as it used to be. You can thank greedy Wall Street bankers and mortgage brokers that triggered a financial crisis and real estate meltdown for that. These days people just starting out in the world of finance face a tougher credit environment than people in their shoes just a few years ago. But it’s tough to get ahead without the responsible use of credit in your financial arsenal. Your biggest hurdle may be the simple fact that you have no credit history. To banks, credit card companies and other lenders you are an unknown risk. That means your credit is going to be hard to get or expensive.

Establish credit with personal responsibility

Credit is a “what came first” question. Was it the chicken, or the egg? If you don’t have credit, how do you get credit? reports that young people new to credit usually need a co-signer to get either a credit card or a bank loan. This works out great if you quickly demonstrate responsible credit handling. Because sooner rather than later you’re going to want to have credit in your own right. This means always making payments on time. Late or missed payments will hurt the credit score of the person who was willing to step in as your co-signer. This is especially important if your co-signer helped you get a credit card. Always clear the balance in full each month and never pay interest. Simply put: if you can’t afford to buy something, don’t use your credit card.

Secured credit cards

If you need to establish credit (which you do) and a co-signer isn’t available, rent an apartment and pay all your bills on time. A solid payment record on rent, phone and utilities will start to make a difference. Then try a secured credit card. reports that a secured credit card may be the only way to establish credit. A secured card requires a cash collateral deposit that becomes the credit line for that account. For example, if you put $500 in the account; you can charge up to $500. You may be able to add to the deposit to add more credit, or sometimes a bank will reward you for good payment and add to your credit line without requesting additional deposits.

Don’t get burned — shop around

A secured credit card is similar to prepaid debit cards with one big difference: secured credit cards can help you build your credit. Wallet Pop reports that while these cards come with annual fees, some are available for only $25 or $30 per year. There’s no reason to pay the up to $80 some issuers charge, so shop around. Also, be sure to read the fine print about other fees to make sure you’re not getting suckered into a “fee harvesting” card designed to nickel and dime you to death instead of help build your credit.

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