4 Ways to Get Initial Credit

Getting credit, especially intial credit, is tough. Coming from a household that never really talked about money and how to manage it, I certainly didn’t know how I could get credit when I first started out on my own. What I learned quickly was that it is a very frustrating process to say the least. Hopefully today’s post will help you out a little and get you headed in the proper direction.

Credit Cards

Before we move ahead, I want to point out on thing:

Americans put far too much value in their FICO (Fair Isaac Corporation) scores.

I will acknowledge that the score is becoming increasingly important because it is now linked to insurance rates, mobile phone plan prices, and a myriad of other things. However, “FICO pride” is alive and well in this country. What I mean by that is MORE people care about a high credit score than they care about having money in the bank or their 401(k) account.

I’m not saying you shouldn’t have a high credit score, because you should. All I want to point out is that a high credit score DOES NOT mean you’re winning financially. It DOES NOT mean you manage money well, and it certainly DOES NOT mean you have wealth.

All a high credit score means is that you’ve borrowed money frequently, for a long period of time, and consistantly pay it back on time.

4 Ways to Obtain Initial Credit

If you’re asking ‘how can I get credit?’ I will simply let you know that your options are limited. This post is merely to give you the options that I know to be available. However, please understand that I’m not saying you should do all of these.

Some of these options are good and a few of them are terrible. I will get into that in my follow-up post here in a couple of weeks.

1. Apply for a Secured Credit Card

A secured or bad credit credit card simply means that you have to pay for your line of credit upfront. The amount will vary depending on the banking institution and the amount you’re willing to put down. It can range from a couple of hundred dollars to a couple of thousand.

A secured credit card is good for the bank and it’s good for you in that:

  1. If you were to miss a payment, the bank has your initial deposit on-hand to cover the balance. So the bank has very little risk.
  2. It’s good for you simply because it gives you the opportunity to build and get credit. FICO says that they do not differentiate between unsecured and secured debt, which simply means that they both have the same impact on your credit score.

As with all forms of credit, you should shop around to find the best interest rates and deals. Try to avoid any cards with annual fees (money they charge you just to have the card). A good place to start this search would be to talk to the bank or credit union with which you have a checking/savings account.

2. Get a Car Loan

This is not a good idea if you are not planning to get a car in the first place; however (unfortunately), it is an option.

Car dealers and manufacturers are always willing to sell you a car. If you show any ability to pay the monthly payments, they’ll wisk you into a new car as fast as Jimmy John’s can make you a sandwich.

The dealer knows that they don’t make money when they sell a car…they make the money when you finance a car. If you don’t have any credit, and you’re looking to build it, they’ll be more than happy to put you into a loan with a 20% interest rate.

3. Find a Co-Signer

As I mentioned at the start of this post: getting initial credit is tough. When I was trying to get student loans on my own, prior to having established credit, I was shot down every time.

There aren’t many companies that want to take the risk of helping you start your credit — and rightly so. In their eyes you don’t have a track record of borrowing money and paying it back…so it only makes sense.

One of the ways you can get approved though for a loan or a credit card is by having a co-signer that has established credit (and a high credit score).

By having somebody co-sign with you, the bank mitigates their risk by being able to go after the co-signer if you’re unable to pay the bill or monthly payment.

4. Use Money as Collateral

This is similar to a secured credit card. With the secured credit card, you’re using your upfront cash as collateral on your line of credit.

So, if you have money in a savings or checking account, your lending institution may allow you to use that as collateral for a small loan. The loan would have to have a purpose though: buying a car, furniture, or something of that nature.

Just like with the secured credit card, the collateral (money) alleviates the risk for the bank and ensures that they’ll have money to take if you’re unable to make the monthly loan payment.

There may be some other options out there to get credit, but these are a few ideas that I know of. You may be able to get credit if your utility bills or mobile phone carriers report to the credit agengies (TransUnion, Equifax, and Experian), but that isn’t very common.

Always be smart with building credit. It won’t happen overnight, but after 6 months to a year of making your payments on time, you’ll have built up enough of a rating to have other options available to you.

Picture by FreeDigitalPhotos.net.

About the Author

By , on Jun 12, 2013
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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  1. Matt says:

    Agree with others who have pointed out how crucial it is for parents to help their kids get started in terms of credit and responsible debt management. Setting a good example will ensure that their children make good financial decisions their whole lives.

  2. Another one is having someone add you to their credit card. This would more likely work best if your parents did it for you at a younger age to help you build credit. That way you already have a decent score and credit file history.

  3. Christine says:

    I’m glad you mentioned that a good credit score does not equal “winning financially.” That is the very thing that frustrated me SO MUCH when trying to get that first piece of credit because I kept thinking “I’m great at managing my money! I have no debt, am saving for retirement, and have a great emergency fund. Why won’t anyone trust me with credit!!!??” Great article!

  4. Heather says:

    Hi Andy-
    I found your site a couple months back when you did a guest blog at pennypinchinmom.com. I”m now reading and enjoying many of your older posts. I wanted to share how I got my credit started many years ago, which I realize will not be an option for many, but it certainly assisted me in establishing my 800+ credit score.

    I was fortunate enough to have a mom who had fantastic credit (but not a penny to her name, unfortunately) trusted my financial decisions & allowed me to “piggy back” off of her established hard work. When I was 16, my mom and I got a credit card together as equal partners. Soon thereafter, I began driving. The credit card allowed me to get gas up without going into the station’s store to pay by cash and offered me the peace of mind of having extra money (if needed) to have the car repaired or towed if problems arose with my 10 year old car. My mom’s kindness skyrocketed me to beautiful credit by the “ripe ole’ age” of 18.

    In addition, while my mom could not afford to buy me a car, she was generous enough to get a loan in her name while I made all payments. The bank told me that if I kept a copy of the cancelled checks, when the loan was paid off, they would give me the credit for the loan. When I graduated from highschool, I used my graduation gift monies to pay off my car. By the time the loan was paid, my credit was so good, I didn’t need the bank’s assistance. Thank God for a kind-hearted mother!

    In turn, my son is now 16, and got his driver’s license less than a month ago. My husband and I just gave him my mom’s car, which is 11 years old and has 110,000 miles. We plan on helping him build his credit in the same fashion that was gifted to me. As a parent, it is important to monitor a child (whether they are below 18 or a legal adult) who you establish credit with so it doesn’t come back to hurt you in the end.

    • Andy says:

      Heather, thanks so much for contributing and I’m glad you’re enjoying the post!

      I appreciate the additional insight and testimony of another great way to build initial credit. While I’m not a parent myself (yet), the truth is that you have to really have a responsible kid in order for this to work out. (Which can be done if you’ve taken some time to instill good financial principles in them)

      It is a very good option though if you have a trustworthy kid and they clearly understand what the credit card should (and shouldn’t) be used for.

  5. Tonja says:

    Thanks for this post. My 20-year-old son just applied for his first credit card so he could start building a credit history and was turned down because of his student loans. We didn’t think of the secured credit card. I’ll let him know to look into it.

  6. Sue says:

    I support most of what you’ve said up until this point. My goal is to have a zero FICO score, and now that I’m out of debt forever, I’m just waiting on a little time. I don’t need to “build my credit”, nor do I want to. Find a co-signer? I’m telling Dave! 😉

    I do realize that this can affect my insurance rates, but I’ll just find an insurer that will listen to ME, not just my FICO score.

    Keep up the great work, Andy!

    • Andy says:

      Hi Sue! Thanks for commenting!

      Having a “0” FICO score is a wonderful thing, however for the normal American it may be something that is unachievable. The average person will need to borrow money (if nothing more than simply for a home), and they will need a credit score to do it.

      I’ve changed my mindset a little on this subject since I’ve been coaching people 1-on-1. We’ve had a client who was debt free, had a “0” credit score, and couldn’t get a mortgage. They even tried to go through Churchhill Mortgage (the people Dave Ramsey endorse), and they couldn’t get it through manual underwriting.

      So, unless you’re going to pay cash for everything, you need a credit score. And while your goal may be to pay cash and have no debt, that might not be possibly for most people. And those people must know how to properly attain credit, build it, and manage it without making it the focus of their financial life.

  7. Matt says:

    Did someone hack your blog, or is this a joke?

    • Andy says:

      Hi Matt! Thanks for taking the time to comment on the blog.

      I will say that nobody hacked my site and the post was certainly not a joke. Understanding legitimate ways to obtain initial credit (and build credit) is an important piece of knowledge that all Americans should have.

      Everybody should also know the importance of the credit score, but realize that having a high score is not an indication that you’re successful – financially speaking.

      I hope that helps to clarify your confusion. Thanks!

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