So, what are other alternatives if our prospective borrower is jobless or without co-signer? When it comes to establishing credit for the first time, the options are limited … but there are options:
Become an "authorized user" on a parent or relative's credit card. By becoming an authorized user, students essentially 'piggyback' on a parent or relative's good credit history – as long as the account is in good standing, has a low balance and has no negative payment history. Because authorized user accounts are reported, just like the primary account holder's, the student gets all of the benefits of a positive credit card account with none of the payment liability. This is a great way for parents to monitor their child's spending and introduce them to the world of credit, its benefits … and its risks. The drawbacks? As the primary account holder, the parent or relative is legally responsible for all of the authorized user's charges. If it gets out of hand, the primary account holder is left holding the bag.
Open a secured credit card. Secured credit cards are another great way for students to earn and establish credit, without the need for a co-signer or income verification. And because they're secured, they're much easier to qualify for. With secured credit cards, the student secures the credit card with an upfront cash deposit equal to the credit limit on the account. Secured credit cards are still subject to the same guidelines outlined in the CARD Act for traditional credit cards, however the upfront security deposit meets the requirements in proving the student's ability to pay.
Cash up front. Most secured credit cards require a minimum cash deposit of $200-$500 to open the account. For this reason, credit limits on secured credit cards are often quite low. Plus, the student has to pony up a large amount of cash – up front.
Watch your limits. Because secured credit card limits are typically low, it doesn't take much to "max out" with only a few purchases. With that in mind, it's also important to keep the balance low in proportion to the credit limit (known as the utilization rate) because this ratio is a factor in your credit scores. Keeping your balance at 10 percent of your limit – or less – is best if you want to build a good score.
Reporting to all three bureaus. When choosing a secured credit card, choose one that reports to all three of the major credit reporting agencies. If it's not reported, it's not included in your credit reports … and you won't get credit for establishing the account.
Adam Levin is chairman and cofounder of Credit.com. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.