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You Need Credit to Get Credit? Here’s How to Beat the Frustration

Nov. 25, 2014
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Some of life’s great paradoxes revolve around finances. “It takes money to make money.” “To get a job, you must have experience. To get experience, you must have a job.” And the one we love to hate the most: “In order to get credit, you have to have credit.”

It’s frustrating when you want to prove you can be responsible with credit, but you aren’t given the chance because you can’t get approved for credit in the first place. Don’t despair: The Nerds have a couple of tips to get your credit history started even if you don’t qualify for your own credit card yet. After that, responsible habits will get you into the excellent credit range before you know it.

Get by with a little help from your friends (or family members)

One of the easiest ways to build credit is becoming an authorized user on a loved one’s credit card. As an authorized user, you’ll be able to use the card, but won’t be required to make payments on it. You also won’t have the ability to make changes to the account — like adding another authorized user or requesting a credit limit increase.

It’s of utmost importance that you don’t abuse your authorized-user privileges, for the sake of your relationship with the primary cardholder on the account. If the relationship goes sour, you may be kicked off the account and you won’t be able to build your credit. Plus, you may lose a friend or alienate a family member.

Before the primary cardholder adds you to his or her account, set ground rules. Will you have a monthly spending limit? Are you expected to pay your balance, even though you aren’t legally obligated to? Do they want you to help pay for any fees? Come to an agreement on everything before entering the primary cardholder/authorized user relationship. And have the primary cardholder make sure that his or her issuer reports authorized user activity to the credit bureaus, or else this will all be for naught.

Secured credit cards, aka a ‘trust fall’ exercise between issuer and cardholder

Issuers don’t want to give you credit, because you have yet to prove that you can use it responsibly. But there’s nothing better than cash in hand to buy a little trust. A secured credit card is backed by a cash deposit usually equal to the card’s limit. You still have to pay off your balance each month — or at least make the minimum payment — but if you don’t, the issuer can sleep soundly knowing it has your cash for back-up.

If you go with a secured credit card, make sure your activity is reported to the major credit bureaus. Also, make all of your payments on time to build a positive credit history. Need help choosing a card to apply for? Here are our favorite secured credit cards. And here’s information on moving from a secured to an unsecured card once you’ve proved yourself to be creditworthy.

The takeaway: It seems nonsensical that you have to have credit in order to get approved for credit, but that’s how it works. But there are ways around this frustrating paradox: You can build credit by getting added as an authorized user to a loved one’s credit card or applying for a secured card backed by a cash deposit. After you’ve proved that you can be trusted with credit, you’ll have an easier time getting your own credit accounts with favorable terms.

Frustration image via Shutterstock