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What if I Need a Co-Signer But Can't Get One?

Eva Norlyk Smith Ph.D.

March 12, 2013

QDear Eva,

What do you do if you need a co-signer, but there is absolutely nobody who can or will co-sign for you? I'm 21 years old and a single mom, and I'm going to need a new car within the next year (or sooner). I have no credit because I rent and don't use credit cards, and my current car was a hand-me-down from my sister, so I've never had a car loan either. I don't have the kind of cash lying around to pay more than $500 up front, so I'll need a loan to get a car, but I'm guessing I'll need a co-signer. There's nobody I feel like I can ask because all my family members have problems of their own. I work, but my income isn't high. So what can I do? – Carrie

AHi Carrie,

Finding a co-signer is never easy, but here's some good news: You don't have to depend on other people to get that car loan. There is another option available to you that's guaranteed to get you a car loan and give you numerous other benefits: Instead of focusing on getting a co-signer, turn your attention to building a good credit score.Ask Eva

Building good credit isn't as hard as you may think, and it doesn't really matter that your income isn't high. The key to building good credit is simple: Pay bills on time, and don't use credit excessively. As long as you do those two things, you can easily build a great credit score.

Some other good news: Car lenders are set up to deal with all levels of credit, and even people with fair credit can easily get approved for a car loan. There is a caveat, however, and it is a big one: The worse your credit, the higher the interest rate. So even with a co-signer, your interest rate would likely be high if you don't take steps to build your credit.

If you have six months to a year before your car falls apart completely, you've got time to build a decent credit record. So let's look at the key things you need to do now.

1. Apply for a credit card.

One of the fastest ways to establish a credit history is to take out a credit card. Credit scores rely heavily on your credit card history, as it demonstrates your credit management skills.

Getting your hands on some plastic is not as hard as you may think. The easiest approach for most people is to apply for a credit card online. Try one of the credit cards targeting people with limited or no credit history — Capital One's Cash Rewards for Newcomers, for example. It's a rewards credit card without an annual fee that also lets you earn 1 percent in cash rewards on purchases.

2. Can't get a regular card? Get a secured card.

If you are turned down for a regular credit card, apply for a secured credit card instead.

A secured credit card functions like any other credit card with one important difference: You have to deposit a (refundable) deposit to secure the credit line. In the case of the Capital One Secured MasterCard, for example, an initial deposit of $49, $99 or $200 will get you an initial credit line up to $200. Deposit more, and your credit line could go up to $3,000.

Secured credit cards can be expensive, so select carefully. The Capital One Secured card comes with a $29 annual fee, which is one of the lowest in the industry. You can easily pay upwards of $150 in fees to get a secured credit card, so do a little research to make sure you get the right one.

Fortunately, you don't have to hold on to that secured credit card forever. Once your credit improves, you can upgrade to a regular credit card and get your deposit back. If you choose a card issuer that offers a range of credit cards (not just secured cards), upgrading can be as simple as a phone call, once you've established a record of good credit usage with the company.

3. Apply for a store credit card

It's good to have a few different types of credit cards, and store credit cards are fairly easy to get approved for. If you don't get approved the first time you try, wait five or six months until the credit-building effects of the other credit card are reflected on your credit history.

4. Handle credit with care

Use your cards every month, but never charge more than you can pay off in full at the end of the month. As long as you use credit cards as a payment instrument, and not as an excuse to rack up debt, you'll reap the maximum credit-building benefits.

In addition to paying in full, it's important to pay your credit card bill on time, or better, five to seven days early. Also, don't carry high balances on your credit card. If it looks like you're maxing out your credit limit, it will detract from your credit score, so always keep balances below 30 percent of your limit, preferably lower.

If you start out with a card with a low limit, as you likely will, this can prove tricky. For a credit card with a $200 credit limit, keeping balances below 30 percent of the credit limit means that you never can have more than $60 in outstanding charges on the card. To avoid this issue, you may want to pay down the bill several times a month. As your credit improves, you can apply for credit line increases with the card issuer, and this will become less of a concern.

5. Track your credit

To see how you progress, it can be fun to use an online credit monitoring service. All of those come with monthly fees, however. To avoid them, you could use this free FICO Score Estimator to get a rough idea of what your credit score is. For the calculator to give an accurate estimate, you'll need to have had your credit cards for at least six months. But it can be fun to use it, even to get a sense of where you will be in six months if you follow the recommendations above.

To get the real deal, which I recommend you do every six months while building your score, go to myFICO.com and pay the $20 to pull your FICO score from one of the credit bureaus.

As a benchmark, excellent credit generally means a FICO score above 720. Even with one as low as around 640, you can get approved for a car loan, although you won't get the best interest rate.

In short, building credit isn't that hard, and a year from now, you'll be glad you did it.

Got a question for Eva? Send her an email.