STUDENT TALK What if my credit score is zero?

No one tells you how and when to start building credit. It's more of an organic thing, with some people graduating high school with their score already higher than the average adult. How does that happen? Even more frustrating? Getting rejected for standard loans and credit cards because you have zero credit score but to get a credit score, you need to get credit. Seems like a big circle with no easy way in. So, where are you supposed to start? It's not as difficult as you might think. The following 5 simple steps can get you on the path to good credit and the ability to successfully apply for loans or credit cards (and hopefully get approved!). 

1. Apply for a secured credit card.

For secured cards, you’ll have to put down an initial deposit (the security), which guarantees your credit line. In essence, this deposit is your collateral, guaranteeing payment. The lender can then keep the deposit if you don’t repay the card. You'll then use the secured card like any old credit card to start building your credit. The lender, usually a bank or a credit union, knows that if you don't pay, the security you gave them will cover it. But you'll also have that security as some "skin in the game" if you will, to build incentive to pay your card on time. Eventually they may allow you to apply for a regular card. At that point, check out this post on how to apply for a credit card. 

2. Apply for a credit-builder or secured loan.

Some financial institutions provide credit-builder and secured loans specifically created to help people build credit. MIT Federal Credit Union offers a credit builder option like this! For credit-builder loans, like the secured credit card, the lender places the money you borrow into a savings account, to secure the loan. The difference is, you're borrowing the money to secure the loan. Then you pay it off over time, and eventually it's yours. Consider it a forced savings account, but you build credit at the same time. You won't get the money up front, but you will get both the money saved and the money you paid back at the end of the term. Alternatively, if you already have money with the financial institution, you can inquire about secured loans. This is the same concept as a secured credit card, except the money in your account or certificate of deposit is being held as collateral for the secured loan, and you'll receive the funds you're borrowing. This can also work if your parent or guardian is willing to provide funds from their account to secure the loan.

3. Have someone co-sign a loan or credit card with you.

The co-signer, someone with good credit and a constant income, will have to agree to share responsibility with you when it comes to making payments on time. If you go with this option, be responsible with making payments. Otherwise, your co-signer will get hit with payments, collection calls, and a negative impact on their credit score. 

Another option is getting a co-guarantor. For example, MIT Federal Credit Union allows a parent/guardian to be a co-guarantor. The difference between a cosigner and a co-guarantor is the co-signer is immediately responsible for payments. The co-guarantor is only pursued if the loan has gone into default. If you make a payment a few days late, the co-guarantor will not be contacted. Understanding the difference between co-guarantor and co-signer is important. You don’t want a bank or credit union bothering someone who tried to help you out when you’re a few days late on a loan.

4. Get added as an authorized user. 

This means being added as an authorized user to someone else's existing card/account. Perhaps your parent’s credit card? Perhaps someone else you trust (and who trusts you) who has great credit history and is willing to give you a start. Be responsible, and make sure to set spending rules and expectations on the shared credit card. Also, check that the credit card will report authorized user activity to a credit bureau. Otherwise, this option will be pursued in vain.

It is also better to regard this as a short-term solution to jump-starting your credit score. Credit bureaus will still want to see evidence that you can independently manage your own payments. You don’t have to limit yourself to one option. Consider pairing both the option of becoming an authorized user with getting a credit-builder loan. Nerdwallet has a great article outlining the benefits and reasons for becoming or not becoming an authorized user.

5. Look for "Student credit cards" or cards designed for those with a low credit score.

At the end of the day, you can still shop around and find unsecured credit cards with less stringent eligibility requirements. Expect the interest rates on those cards to be higher, and the presence of an annual fee. Although that fee may be waived for the first year if you spend a minimum amount on the card. Once you’ve built up a decent credit score, you can start looking for other credit cards more in line with your interest rate and rewards type goals. 

And that’s basically it. Of course, building credit is easier said than done. Don’t forget that credit scores are a reflection of reliable payment and credit history. They can also be a crucial component in determining if you’ll get a lease, an affordable insurance plan, or land a job. That’s right, it may not seem fair, but many employers review your credit report as part of the hiring process. If yours contains a late payment or two, that’s one thing, but a low score, charged-off accounts, bankruptcies or worse can have a significant impact on your ability to actually get that job you’re hoping for. Once you’ve built up a good credit score, keep up the great work.

Sites used for research:
Bankrate
Investopedia
Nerd Wallet