When you say you want credit, you are probably asking for payment terms on a purchase. You are seeking to purchase goods or services today and forego all or a portion of the payment until a later date. You may or may not be bound by a payment plan. You may or may not be required to pay a percentage of the purchase price up front (down payment). You may or may not pay a fee (interest) in exchange for the privilege of buying now and paying later. In all cases, you are making a purchase and being trusted to make final payment at some time in the future.
How do you get credit?
Get help from someone with a good credit rating
Reducing exposure is one way to make lenders more comfortable with your credit application. Reducing risk is another. Risk is the degree of likelihood that a loss will result. You can minimize the risk to a lender by providing a comaker, cosigner, or guarantor for your loan.
You may be able to reduce risk by having a parent or other relative cosign on a loan or credit card for you (most lenders require the cosigner to be related in some way). Cosigners should be aware that they are liable for any unpaid balances and that credit activity will be reported on their credit report, as well as yours. Generally, if your cosigner has a good credit rating, lenders will be satisfied that risk is minimized and will extend credit. You may be able to borrow enough for a car or even a home.
Caution: If you are getting help from parents to establish credit using a credit card account, make sure you are a joint cardholder and not just an authorized user. If you are merely listed on their account as an authorized user, then you are not legally liable for the debts. Using the card will not help you to acquire a credit history because it will not be included on your credit report.
Get the government to guarantee your loan
If you are a full-time student at an institution for higher learning, you probably qualify for one or more government-guaranteed loans. Most government-guaranteed student loans are available even if you do not have a credit history. Lenders are willing to extend enormous amounts of credit under these plans because the government agrees to repay the loan if you don’t.
Caution: Your failure to pay will be reported to the credit bureaus, and the federal government will pursue you for the unpaid balance.
Caution: It takes a long time to establish a credit history with student loans. If you are a freshman in college, your first-year loans may not become due and payable until six or nine months after you graduate. Until you start making payments on the loan, account activity will not be reported to a credit bureau. It could take years to establish a credit record in this manner.
Secure your credit with collateral
When you secure credit, you give the lender collateral to back your loan. The risk is reduced for the lender. If you do not pay, the lender can use the value of the collateral to satisfy the debt. Collateral can be anything of value, but usually takes the form of cars or real estate. If you have something of value, but no credit rating, you may be able to acquire credit by offering to post your valuables as collateral.
Caution: Many large banks sell their secured loans to investors and cannot customize loan documents if unconventional collateral is involved.
Get a secured credit card
Many credit issuers offer secured credit cards. A secured credit card provides you with an open line of credit secured by a cash deposit. These types of cards typically come with a high interest rate. Here is how a secured credit card works. You give the credit card issuer a cash deposit. The credit issuer gives you a credit card with a credit limit equal to the cash deposit. You can charge up to the credit limit using the card, and then make monthly payments on the balance. If you fail to make the payments, the credit card issuer uses your cash deposit to cover the unpaid balance. If you make your payments as agreed, you will eventually establish credit and qualify for an unsecured credit card. The secured credit card issuer will return your deposit, less any unpaid balance due, when you cancel the account.
Make large down payments
If you have not established credit, you can still obtain financing for major purchases (such as a new car) if you can afford to make a large down payment. A large down payment reduces the lender’s exposure by reducing the loan amount. With a smaller outstanding balance, there is less at stake for the lender. The large down payment also makes your monthly payments lower and shows the lender that you are committed to making the purchase. Even if you have no credit history, you should be able to get financing for a reasonably priced car if you are willing to make a down payment of 20 to 50 percent of the purchase price. You will also need income sufficient to make monthly payments on the balance.
Consider insuring your credit
Some automobile dealerships can arrange financing for people with no credit history by using repossession insurance. Here is how repossession insurance works. You make a standard down payment and agree to make payments on the balance of the purchase price. You also agree to pay premiums to an insurance company that will cover the lender’s loss if you fail to make payments and the car is repossessed. Repossession insurance (sometimes referred to as repo-insurance) is expensive, but it is one way to obtain a loan and begin establishing credit.