How to Build Credit When You Have No Credit History
If you are trying to build credit, you may be confronted with one of life’s great contradictions: To get credit, you must have a credit history.
If you have no credit history, creditors treat you as if you have bad credit. This may seem unfair, but the reason is that you have not shown that you have the discipline to make on-time payments over an extended period.
When you do, you will have good credit and good credit comes with enormous advantages. Two generations ago, people got by on cash and a checkbook. Though a few still do, navigating the 21st Century without a credit card is very challenging.
If you want to shop on line, credit cards are a necessity. Not having one makes the process cumbersome, if not impossible. Even public transit systems now use automated machines that accept credit cards and distribute tickets. And when was the last time you saw someone pay for a restaurant meal with a check?
Having a credit history is crucial for bigger purchases, too. If you want to buy a car and need a loan, the dealership will run a credit check. If you’re planning to rent an apartment, expect a credit check as part of the vetting process. Cable companies and utilities check your credit and, if you don’t have a solid credit history, will require a security deposit. Sometimes, prospective employers will access your credit rating when they are deciding whether to offer you a job.
The standard for creditworthiness is a FICO score, a three-digit number, ranging from 300 to 850 to let lenders know what sort of risk you pose as a borrower. Building strong credit score – the closer to 850 the better – can help you borrow at lower rates and obtain credit cards with higher borrowing limits and more perks.
Fortunately, establishing credit isn’t hard, but you need to learn some tricks that will improve your borrowing profile. Consider these techniques:
Get a store card
Many retailers and gas stations will give you a branded credit card, even if you have no credit history. Use it, but don’t buy more than you would buy with cash. Pay off the entire bill at the end of the month. Ask that the department store report your credit history to credit bureaus.
Apply for a secured credit card at a bank
With a small deposit, say $500, you can obtain what’s known as a secured credit card, one that allows your bank to tap your account if you fail to pay a bill. Your credit limit will be the amount you deposited. Though the card isn’t useful for making big purchases – most secured credit cards have a limit under $500 – if you pay your bills on time and leave your security money untouched, you will begin proving your creditworthiness. That will enhance your credit score. Once you have a strong credit score, you can close the secured card account and apply for an unsecured credit card.
Apply for a credit-builder loan
A credit-builder loan is used specifically to build a credit score. The lender will put the money you borrow into an account, and you’ll make payments on the money until the full amount is paid. The lender will notify the credit-rating bureaus as you make payments. When the loan is paid, the money is released to you and the credit bureaus have a basis for assigning your credit score. Credit unions and community banks are often the best places to check for this sort of loan.
Find a co-signer
If you have someone with a good credit score who is willing to co-sign a loan, and you repay the borrowed money, that will build your credit score. Not everyone will be willing to co-sign with you, since the other party is personally liable if you fail to repay the loan. If they can’t make the payments after you default, it will damage both of your credit ratings.
Become an authorized user on another person’s credit card
If you know someone – often a parent or close relative – with a good credit history who is willing to make you an authorized user on their card, your borrowing can help establish your credit credentials even though the primary cardholder is obligated to make the payments. If establishing a credit history is the goal, check with the card issuer to make sure that your activity on the card is reported to a credit bureau.
Use an alternative credit building method
Rent reporting services like Credit Karma will add rental payment in your credit history. If you pay on time, it can help build you credit score. On-time payment of utility bills is a score builder. You should ask your phone, water, electric, gas or cable company if they report your payments to credit bureaus.
Consider a student credit card
If you spend conscientiously, student credit cards designed for young borrowers can be a way of building a credit history. These introductory cards have disadvantages, including low borrowing limits and higher interest rates. You shouldn’t apply for one of these cards unless you are confident you have the money to meet the monthly bills.
No matter what strategy you’re using, make sure you always pay your bills on time. Some lenders require payment in full. Most allow you to make partial payments. Payment in full is always the best no matter what the bill. Also, if you obtain credit, be aware of your credit utilization. If you do carry a balance, make sure it doesn’t exceed 30% of your borrowing limit. Exceeding that can hurt, rather than enhance, your credit score.
Whether you have established credit or not, you should avoid opening too many accounts at once, since this will lower you score. Keep accounts open once you have them if possible. If you card doesn’t have an annual fee and you don’t need it, put it in a safe place rather than closing the account. This can help your credit utilization rate, since it is computed using the combined borrowing limits on all your cards.
As you take steps to build you credit, remember to check your credit card bills for accuracy and fraudulent charges. Also, periodically check your credit score. You can do this by contacting any of the three credit rating bureaus, and credit card issuers increasingly are offer updated scores through their payment websites.
Caution. A secured credit card is not as good as an unsecured credit card, in terms of credit building, but it can help you get started.
El Issa, E. and O’Shea, B. (2017, September 26) How to Build Credit. Retrieved from: https://www.nerdwallet.com/blog/finance/how-to-build-credit/
Devaney, T. (2017, October 12) How to Build Credit from Scratch. Retrieved from: https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch/