To build credit, you must get approved for credit. But more often than not, you will be rejected if you do not have a strong credit history – which is very frustrating if you do not have credit or are recovering from past mistakes.
If you’ve been denied credit too many times to count, you’ve come to the right place. Keep reading to learn how to build credit when your rejection persists.
5 ways to build good credit when everything is denied you
Before you apply for credit again, get a copy of your free credit reports from each of the three offices at AnnualCreditReport.com. Up to one in five reports contain errors, so you need to make sure you are not dismissed for misinformation. If you discover errors, such as an account you don’t recognize or an incorrect balance, dispute the information directly with the credit bureau.
Once you’re sure your credit report is accurate, you’ll need to start creating credit. The only way to do this is if you have an account that the offices are regularly informed of. Here are five strategies to try.
1. Open a secured credit card
One of the easiest ways to rebuild credit is to open a secured credit card. You deposit a small amount – say $200 or $300 – and this becomes your credit limit. Since you are making a deposit, the risk to the lender is minimal. This is why your odds of being approved are much higher compared to a traditional card.
Always keep credit card balances below 30% of your open balance. The percentage of credit you use is called your credit utilization ratio, and you want this number to be as low as possible.
2. Get a credit generator loan
A credit building loan is similar to a regular loan in reverse. Usually with a loan, you get the money up front and then make payments on it. With a credit generator loan, you can make the loan payments, but it goes to a bank account. Once you pay off the loan, you finally get your money back.
Most of the major banks do not provide loans to build credit. Check with a local credit union or online bank to see if they have this option.
Making payments on time is the #1 thing that will help your balance. Your payment history determines 35% of your score.
3. Use the rental reporting service
Usually, your housing payments are your biggest expense. But if you rent your home, rent payments likely won’t help your credit score because most landlords don’t report the payments to the offices.
One option is to use a rent reporting service, such as Rent Reporters, Credit Rent Boost, or Rental Kharma to send office records showing that you have paid rent. Your landlord may need to verify your payments.
Before registering, look carefully at all fees involved. Many services have a setup fee in addition to the monthly fee.
4. Get a co-signer
If you don’t qualify for credit yourself, you may be able to get a family member or friend with good credit to sign up for you. The co-signer is responsible for making payments if you fail to do so. Most major credit cards no longer accept co-signers, so this is more common when applying for a loan.
Only select this option if you are 100% confident that you can make the payments. Set up automatic payments so you don’t forget. It’s not just your balance on the line here. If you miss payments, it will delete the credit score of the person who cared about you enough to co-sign.
5. Become an authorized user
When someone adds you as an authorized user to their credit card, you are allowed to use the account but you are not responsible for the payments. Sometimes, parents add their children as an authorized user to help them create credit. If someone is willing to make you an authorized user, check with the credit card company to see if they will report the status to the offices.
Becoming an authorized user can help you build a credit footprint. But since lenders know that you’re not in trouble about payments, it probably won’t make much difference in deciding whether you’ll get credit in the future.
How often should you apply for credit?
Applying for new credit frequently can harm your credit score. Each application results in a difficult inquiry about your credit report, which can lower your score by a few points. (Note: If you apply for a certain type of credit, such as a mortgage or car loan, multiple times within a short period, the offices assume that you are evaluating the shopping and treat the applications as a single inquiry.)
A good rule of thumb is to wait about six months between applications for credit. Once you get approved, focus on making payments on time and you will see your balance gradually improve.
Robin Hartell is a certified financial planner and senior writer for The Penny Hoarder. She writes a personal financial advice column Dear Penny. Send your tough financial questions to [email protected].