Thanks in large part to the financial meltdown, credit standards for all sorts of financial products have gotten much stricter. This means that if you want to buy a car, buy a house, or just get a credit card for emergencies, your limited credit could be just as much of a problem as if you had previously declared bankruptcy or walked away from your foreclosed home.
Just a few years ago, someone with no previous credit history could at least get a basic credit card with a low credit limit and start building away. But now that game has gotten a lot harder to play, and credit card companies are much more reluctant to hand out credit to people with no proven track record. Which also means that plenty of other snake oil salesmen have stepped up to “help” you where the banks won’t.
So here are 5 tips to arm yourself with before you venture out into that world.
1 First and foremost, don’t get scammed
This is both the most obvious and the most subtle tip I can provide. Con artists love the internet, and they love people with limited access to credit, because they assume that you are naïve.
So when you’re evaluating an offer on the web that sounds too good to be true, it probably is. A great example is the Anacott Financial Unsecured New Wave Credit Card, which we uncovered a few weeks back. In that blog post, we detail a few reasons why this card is fraudulent and have gotten a number of comments from people who were taken (we also Youtube’d about it here). The lesson to be learned here is that if someone is offering you a credit card regardless of your credit, as long as you give them $99, your bank account info, and a copy of your driver’s license, then it’s probably not ok.
2 Yes, you should get a credit card
I’m probably preaching to the choir here, but there is a growing contingent of people in America who are eschewing credit cards and decrying the evils of credit. More power to them, but the fact is you can’t get very far without a credit history, and the easiest way to build one is with a card.
When it comes time to buy a car or a house, you will probably not be paying straight cash, which means you’ll have to take out a loan. And while these are generally considered “good credit”, while credit cards are “bad credit”, the fact is it’s all based on the same credit score, so your limited credit could costs you tens of thousands of dollars of mortgage or auto loan interest over the years.
You’re better off getting a credit card with a low credit limit so that you aren’t tempted to go overboard, and keeping it active for years while your credit score slowly improves. As you become more comfortable with it, start asking for an increased credit limit, since higher (unused!) limits help your score as well. We list a number of options for people with limited credit histories, and also have a selection of student credit cards for the young’ns. Here are a couple of our favorites:
[nw:compare 11709 7032]
3 Can’t get a credit card? Go secured, but read the fine print
Secured credit cards function a lot like normal credit cards, except you post collateral upfront. So you give the card issuer something like $300, and then you get a credit line of $300. You won’t get that $300 back until you close the account. You have to pay your bill every month, and you’re subject to interest charges if you don’t, just like a credit card.
Be aware that many popular secured credit cards, like the RushCard, charge a number of fees that you wouldn’t initially anticipate, so make sure you read the fine print. We try to disclose as many fees as possible in our secured card listings, and here are a couple of our favorite recommendations:
|US Bank Harley-Davidson Visa Secured||Capital One® Secured MasterCard®|
on US Bank's
on Capital One's
|Intro APR Promo|
4 Try to avoid pre-paid debit cards
More and more people are turning to pre-paid debit cards these days because there’s no credit line, and they know they won’t get eaten up by interest charges. The biggest problem with this approach is that it does nothing to help your credit score, since these cards almost never report to the credit bureaus.
Debit cards also don’t allow a lot of the conveniences and protections that credit card offers. You often can’t rent cars without a huge upfront deposit, and if someone cleans out your debit card account, it’s a lot harder to get that money back than it is to dispute a credit card charge. Plus, just like with many secured cards you will likely end up paying a ton of money in fees.
5 Build, don’t break
Remember, the point here is to build your credit history. So once you get a credit card and you start on track to higher and higher credit scores, don’t go overboard. Every missed payment counts against you, maxing out your cards counts against you, and opening too many credit cards counts against you.
So once you’re given a little bit of rope, don’t use it to hang yourself.