Building credit can feel impossible. It seems as if you can’t get a credit card unless you can demonstrate that you use credit responsibly, but it’s difficult to show responsible credit use if you can’t get a card. If you’ve been rejected for a credit card and don’t know what you can do to prove your creditworthiness, here are three options that can help you get there.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
1. Secured credit cards. Most credit cards are unsecured. That means they aren’t backed by any sort of collateral, like cash or a large asset. If you have bad credit or no credit, you’re unlikely to get approved for most unsecured cards because the issuer will see you as a high risk. However, you have a better chance of getting approved for a secured credit card — a card backed by a refundable cash deposit, usually equal to the card’s credit limit.
Secured credit cards aren’t the same thing as prepaid debit cards. With secured cards, you make purchases and pay them off just like with an unsecured card. The deposit is there to protect the lender if you don’t make your payments. You get your deposit back when you close your account or convert it to an unsecured product. With prepaid cards, by contrast, you load money onto the card and then use that money to make purchases. Secured cards help you build credit. Prepaid cards do not.
A secured card also isn’t the same thing as a credit card from a subprime specialist issuer. While also marketed to consumers with poor credit, subprime specialist cards are unsecured and, according to a recent NerdWallet study, laden with extraneous fees. On average, secured cards save you $125 or more per year in fees compared with subprime specialist cards and have interest rates 9.15 percentage points lower.
If you want to use a secured card to improve your credit score, there are a few things you should do. First, try to use only a small portion of your available credit. Secured cards tend to have low credit limits to start with — often only $200 or $300 — so this may be a challenge. Put only one or two charges on your card a month and pay the balance in full every time the bill comes. And pay on time. A late payment will probably incur a fee, could lead your issuer to raise your interest rate and, if it’s late enough, might damage your credit.
[See: 10 Easy Ways to Pay Off Debt.]
Once you’ve improved your credit, you can ask your card issuer whether you can upgrade your secured card to an unsecured card. If that isn’t an option, choose an unsecured card appropriate for your new and improved credit score to continue building and maintaining a good credit history.
2. Credit-builder loans. Some smaller banks, credit unions and online lenders offer credit-builder loans. A credit-builder loan is an installment loan that helps the borrower — you guessed it — build credit. This is a great alternative for those who have a steady income but don’t want to, or can’t afford to, tie up money in a deposit on a secured card.
Here’s how it works: The money you borrow is deposited into a savings account, but you can’t access it until you’ve repaid the loan. Make your payments on time and fully repay the loan, and you’ll get the money and your timely payments will be reported to the credit bureaus. As with any credit product, late payments can also be reported to the bureaus, potentially hurting your credit score.
3. Authorized user status. If you have a friend or relative with excellent credit who’s willing to add you to his or her credit card account, authorized user status is a pretty easy way to build credit. An authorized user is someone given permission to use another person’s credit card account. Authorized users have no legal obligations to make credit card payments and aren’t allowed to make changes to the account. Activity on the account is reported to the credit bureaus for both the account holder and the authorized user.
If you decide to go this route, choose someone who never misses a credit card payment. Discuss ahead of time whether — and how — you’ll be expected to pay the primary cardholder for the charges you incur. Also talk about an exit strategy: When will you be removed from the account? Perhaps after you’ve achieved a certain credit score or when you qualify for a card on your own.
[See: 12 Simple Ways to Raise Your Credit Score.]
Getting rejected for a credit card is frustrating, but these alternative products can help you improve your credit, making it more likely that you’ll get approved next time. Remember, though, that it’s important to use credit responsibly and avoid any unnecessary interest charges, no matter which credit or loan product you’re using.
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Rejected For a Credit Card? Try These 3 Simple Credit-Building Strategies originally appeared on usnews.com
