Accounts to Build Credit

Lenders do not like to loan money to people who do not have an established credit history. People with no credit have to deal with the conundrum that you cannot qualify for credit unless you have had credit in the past. However, there are certain kinds of accounts that people with little or no credit history can establish. If you manage these accounts correctly then before long you can qualify for harder to obtain forms of credit.

Secured Credit Card

Generally, credit cards have no collateral which means banks assume a high degree of risk when issuing the cards and only allow people with an established credit history to open credit card accounts. However, you can qualify for a secured credit card if you have a low credit score or even no credit history at all because you secure your card with a cash deposit. The bank keeps your deposit in a savings account that you cannot access and provides you with a card with a balance equal to the amount you deposit. Secured cards often have high interest rates and annual fees but despite being expensive these cards enable you to build a credit history relatively quickly.

Cash-Secured Loans

You can establish credit by taking out a cash secured loan at your local bank or credit union. You deposit funds into a certificate of deposit and the bank freezes that account for the duration of your loan term. If you default on the loan, the bank simply liquidates the CD and uses the proceeds to settle the debt. Businesses often use cash-secured loans to establish a credit history in the name of the business so that the owners no longer have to rely on personal loans to fund the business.

Co-Signers

Some people establish credit by applying for loans jointly with co-signers who have good credit. You cannot do this to qualify for a mortgage since lenders require both borrowers to have good credit scores. However, you can obtain a car loan or a credit card if you apply with a co-signer because lenders offset your low score with your co-applicant's high score. You and the co-signer are equally responsible for paying the debt so you must find someone willing to share the debt burden with you.

Other Considerations

Retail credit cards and gas credit cards usually have low line amounts and high interest rates. However, underwriting guidelines for these products are less strict than on regular credit cards so you may qualify even if you have a low credit score.

You cannot improve you credit by establishing deposit accounts but you can harm your score if you overdraw your account and fail to settle the debt. Some lenders approve credit cards based on unconventional credit reports that look at your track record for paying your utility bills and rent payments. If you qualify for a card from one of these lenders it will improve your actual credit score and help you obtain cards from traditional lenders.