The Credit Catch-22: How to Build Credit If You Don't Have It

Strategies to build credit include becoming an authorized user on someone else's credit card, acquiring a secured card or paying off student loans.

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Boy (2-3) wearing oversized shirt and tie, holding credit card
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By Christine DiGangi

The idea that "everybody has to start somewhere" can be really frustrating for people without credit: Good credit comes from properly managing loans and credit cards, but it can be difficult to get loans and credit cards if you have bad credit (or no credit). How the heck is that supposed to work?

A lot of consumers feel this way. In a recent post to Reddit, a 24-year-old asked: How do you build credit when no one will give you a credit card? His situation is more complicated, but there are few ways to address the basic question.

Ask Someone for Help

If you have parents or a relative with good credit, you could ask to be added as an authorized user on one of their credit cards. Doing so will add the account -- along with the history of that account -- to your credit report. This, in turn, can benefit your credit score to the extent that the payment history on the account is good. So make sure you're added to an account with a good payment history and, ideally, a low balance.

You're asking a lot of the person who does this for you. If your mom adds your name to the account of a credit card she's responsible for, she's putting her credit at risk to help you. If you spend more than you're supposed to and don't have the money to pay the bill, she has to cover the cost or deal with the impact to her credit score. A friend or relative could add you as an authorized user and never give you the card, allowing you to benefit from having the trade line on your credit report without allowing you to learn how to use credit responsibly, but that's not necessarily a great way to start building your credit.

Start Small

Secured credit cards are often the best way for people with no credit to establish a credit history. These are credit cards that are easy to get, and they work by requiring you to make a deposit before using the card. That deposit (say it's $500) is your credit limit, and you use the card and pay the bill just like you would with a non-secured card. This allows you to build a payment history and understand how credit card use impacts your credit score. If you don't make payments, the card issuer will take your deposit, but if you use the card responsibly, you can get your deposit back and possibly "graduate" to a non-secured card. Even with a secured credit card, you should shop around for the best terms.

Understand Your Situation

The strategies listed above can work for someone trying to improve from no credit or bad credit, but if you're dealing with bad credit, make sure you've addressed the issues that hurt your credit in the first place.

For example, let's go back to the Reddit user. He wants to build credit, but can't get a credit card because he has unpaid student loans. He never graduated from college and sees himself stuck in low-paying jobs without hope of returning to school. Student loans must be repaid whether or not they result in a degree, but this poster has never made a payment. That undoubtedly destroyed his credit.

Student loans can actually be a great way to build credit, because making payments on time will establish a very strong payment history for the borrower. At the same time, student loans can have the opposite affect on credit if the borrower doesn't make payments, as this consumer has learned. Getting a secured credit card probably won't do much for his credit while he continues to default on his loans, and a poor credit history may mean he has trouble renting an apartment or getting reasonable insurance rates.

If you're having credit problems because of unresolved debt issues, that's probably a better place to start than with a secured credit card. Check your free credit scores and get a snapshot of where you should focus your financial efforts using the free tools available on Credit.com -- then make a serious commitment to paying down debt and building credit.

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