How to Build Credit and Establish Credit When You Have None

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It’s hard to imagine any consumer being invisible in the digital world of the 21st century, but there are as many as 28 million “credit invisibles” in America, according to an Experian/Wyman study. Another 21 million have some credit history but are considered “credit unscorable.”

“Credit invisible” is the tag that the three credit reporting bureaus – Experian, Equifax, and Transunion – give to consumers who have never used a credit card, haven’t had a car loan, never paid a mortgage.

“Credit unscorable” is the label for those who have used some form of credit, like a credit card or small loan, but don’t have enough of a credit history to have a credit score.

Consumers without a credit history or credit score must learn how to build credit in order to access the next level of financial freedom. This includes the ability to get loans to buy a house or car, but also smaller things like not having to pay a large security deposit on an apartment or utility.

You can build credit fast, and even get credit cards with no credit history, but it’s more important to build credit in a responsible way that will lead to a solid financial foundation.

What Is a Good Credit Score?

The standard for creditworthiness is FICO or Vantage score. Both are companies that rate credit with a three-digit number ranging from 300 to 850. Each uses similar criteria, but with different weight (something we’ll discuss a little later) given to each factor. There are many credit-rating companies, but FICO Score and VantageScore are the two largest and are used by the three credit-reporting bureaus.

Credit scores are an easy way for lenders to determine what sort of risk you pose as a borrower. Not all lenders use the same score, but in general, you should shoot for a score of 700 or higher. Building a good credit score means you can borrow money at lower interest and get credit cards that offer better rates, larger borrowing limits and more perks.

To have a score, you must have a credit history, which means you need to get out of the invisible and unscorable categories. The first step in that direction is usually opening a credit card account and making on-time payments over a 6-12 month period.

Why Do You Need Good Credit?

When you use credit responsibly, your credit score improves. Once that happens, you’ll find navigating the world around you is much more convenient, and you’ll also gain financial advantages.

Credit cards are accepted at nearly every retail store, restaurant, gas station and mall in America. If you want to shop online, credit cards are a necessity, since using one is more secure than using a debit card. If you don’t have either, it’s virtually impossible to shop online.

Cards are used for almost everything, from public transit to buying a hot dog and beer at a ballgame. And when was the last time you saw someone pay for a restaurant meal with a check? In fact, there are many places that no longer take cash, or make it much harder to use cash.

Having a credit history is crucial if you need a loan to buy a car or if you want a mortgage to buy a house.

Since it’s an easy way to determine if you’re likely to pay money you owe, landlords and property management companies often do credit checks when vetting renters. Cable companies and utilities check your credit and, if you don’t have a solid credit history, will require a security deposit to provide service.

Some prospective employers will even check your credit rating before deciding whether to offer you a job.

So, having a credit history, and the credit report and credit score that go with it, is vital to your financial future. Here are some ways to get out of the credit invisible or unscoreable categories.

What Credit Score Do You Start With?

If you’re just starting to use credit, you’ll likely have a score in the 600 range. It will improve as long as you make on-time payments. The longer your credit history, the more accurate your score will be. Your score can change frequently. A 600 score one month may be a 620 or a 580 the next month, depending on how you use credit and pay your bills.

How Is a Credit Score Calculated?

FICO Score and VantageScore use similar aspects of a consumer’s credit habits to determine a credit score, but they do it in different ways.

FICO uses five categories of information from your credit report, assigning a percentage to each one. Vantage uses six categories and doesn’t have a specific percentage but ranks them as to how influential they are.

Both consider on-time payments as the category with the biggest impact.

The things that determine a credit score are:

  • Payment history: With FICO, this is 35% of your score. With Vantage, it’s “extremely influential.” Creditors want to know if you will pay your bills. On-time payments lead to a good score. Miss one, or blow off an account completely, and your score will plummet.
  • Credit utilization: This is how much you owe vs. how large your credit limit is. Lenders like to see a 30% or less utilization ratio, meaning if your credit limit is $1,000, you spend $300 or less with your card. If all of your cards are maxed out, that’s not good, even if you pay them all off. FICO counts utilization as 30% of a credit score. Vantage considers it “highly influential.”
  • Length of credit history: The longer you have an account, the better it is for your score. It’s 15% of a FICO score. FICO also wants to see at least two accounts with payments for at least six months. Vantage considers it highly influential and will count an account that’s only been open for a month, if there is also one that’s been open for at least two years.
  • Mix of credit accounts: If you have different types of accounts – a couple credit cards, a personal loan, and an auto loan – that shows you can handle different types of credit. FICO counts it as 10% of your score. Vantage considers it highly influential.
  • New credit accounts: The newer your accounts, the more difficult it is to assess your credit behavior so a lot of new accounts can bring down a FICO score. It counts for 10%.
  • Credit inquiries: The more hard inquiries by lenders, the greater the impact. Both FICO and Vantage, though, will allow several for the same purpose within a set period to count as one inquiry. For example, you’re shopping around for a good car loan and ask 5-6 lenders to give you a rate. FICO uses a 45-day span, but only for mortgages, vehicle loans and student loans. Vantage uses a 14-day span, but includes other kinds of credit, including credit cards. It also allows 45 days for mortgage inquiries.
  • Overall amount owed: Vantage considers how much you owe overall “moderately influential.”

13 Ways to Establish Credit

Once you know how to establish credit, it’s not hard to make it happen. Here are the best ways to build credit:

1. Get a Store Card

Many retailers and gas stations will give you a credit card specific to their business, even if you have no credit history. Before you get one, ask if they report to the credit bureaus. Also, being cautious while using store credit cards is important. Only use the card for things you would buy if you didn’t have a card and pay the entire balance every month.

2. Apply for a Secured Credit Card at a Bank

With a small deposit, usually $500 or less, you can get a secured credit card. These are credit cards for people with no credit history. The deposit secures your payment. If you miss a monthly payment, it comes out of the deposit. The credit limits are usually low, $500 or less, so they’re not good for big purchases, but are good for establishing credit. If you make your payments on time and establish a credit history, along with a credit score, you can close the secured account, get your deposit back, and open an unsecured credit card account.

3. Start a Digital Checking Account

Experian, one of the nation’s “Big 3” credit reporting agencies, has come up with a digital checking account it calls “Smart Money” that can be used when paying rent, utilities, cell phone and streaming services.

The real value is that Experian has paired the Smart Money account with its Boost program, which helps consumers build a credit history and improve their credit score. The Boost program helps consumers get credit for payments they don’t always when paying rent or utilities.

Another bonus: Boost only reports positive (on-time) payment history. It does not report the negative (late payment) history.

“It’s a seamless way to build credit without taking on debt,” said Rod Griffin, Senior Director of Public Education and Advocacy for Experian. “By reporting only the positive information on their credit report, we are trying to help people get in the starting blocks, so they have a chance to build or rebuild their credit history.”

The Smart Money account is used like a checking account or debit card to pay bills as opposed to accumulating debt that you hope to pay back later with a credit card.

The money in your Smart Money account comes through direct deposit or by transferring it from another bank account. There are no monthly fees for using the Smart Money account and no minimum balance needed.

There are some caveats about the Smart Money card that need to be considered. The payments eligible for the Boost program are limited to rent, utilities, telecommunications (cell phones) and streaming services. Not all companies involved in those categories accept Boost. And Experian does not report the payments to the other two credit reporting agencies, TransUnion or Equifax.

4. Apply for a Credit-Builder Loan

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 when you make payments. When the loan is paid, the money is released to you and the credit bureaus have a basis for assigning a credit score. Credit unions and community banks are often the best places to check for these.

5. Find a Co-Signer

If someone with a good credit score 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 since they are liable for the debt if you don’t pay. If they can’t make the payments after you default, it will damage both of your credit ratings.

6. 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 credit card, your borrowing is a way to build credit even though the primary cardholder is obligated to make the payments. If establishing credit is the goal, check with the card issuer to make sure that your card activity is reported to the credit bureaus.

7. Report Rent and Utility Payments to Credit Bureaus

Rent reporting services will add rental payments to your credit history. Go to a search engine and type in  “rent reporting service” to find one that’s right for you. If you pay on time, it can help build your credit. Paying utility bills on time is also a credit builder. Ask your phone, water, electric, gas or cable company if they report payments to credit bureaus.

8. Consider a Student Credit Card

Student credit cards for young borrowers can be a way of building a credit history, as long as they’re used responsibly. These introductory cards have disadvantages, including low borrowing limits and higher interest rates. You shouldn’t apply for one unless you are confident you have the money to pay the monthly bill.

9. Make On-Time Payments Every Month

The golden rule for anyone building a credit history and credit score is: PAY ON TIME! That is, by far, the most important component in calculating your credit score. If you’re 90-180 days late making payments, your account may be turned over to a collection agency, which will damage your credit score for seven years. Paying on time is a good personal and financial habit.

10. Don’t Use Too Much Credit

The second biggest component of your credit score is how much of your available credit you use. The goal should be to use less than 30%. That means if you have a $1,000 card, don’t have a balance of more than $300.

11. Go Easy on the Number of Cards

It’s smart to start with just one credit card and add another later, at least six months later. While both FICO and Vantage like to see more than one credit account, if you apply for two or three cards at the same time, it sends a signal that you might be financially desperate, and it hurts your credit score. While you may want to build credit fast, it’s more important to build it smart.

12. Be Aware of Identity Theft

Identity theft can torpedo your credit if the thief takes out accounts in your name or uses your account. Check your monthly bills to verify that all the charges on it are ones you made. You also can get a free credit report from each of the major credit bureaus every year, and when you do, you should make sure all of the credit accounts belong to you.

13. Credit History Matters

If possible, keep accounts open once you have them. If your 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.

How You Can Improve Your Credit

If you have credit, but it’s not good, all the ways to establish credit also apply to improving credit. Improving your credit score starts with making on-time payments on your accounts.

Some strategies to improve poor credit are:

  • Set up automatic payments: The payments will come out of your bank account automatically, so they will be on time. Just make sure the money is in your account on payment day.
  • Request a credit limit increase: A credit limit increase will automatically improve your credit score by giving you a better credit utilization ratio, as long as you don’t immediately charge a bunch of things and run up the balance.
  • Pay down your cards: If you have several credit cards, and they’re all maxed out, it’s time to pay them down. The most effective way is the “debt avalanche,” in which you make payments as large as you can on the card with the highest interest rate, while making minimum payments on your other cards. This will lower your credit utilization, and also give you more money to make all your payments on time.
  • Talk to a credit counselor: A credit counselor at a nonprofit credit counseling agency, like InCharge Debt Solutions, will help you organize your finances, create a budget, and discuss debt relief options with you. Some options, like a debt management plan or debt consolidation loan, will eventually lead to an improved credit score.

Rebuilding Credit After Bankruptcy

If you are rebuilding credit after bankruptcy, you should consider it the same as starting with no credit at all. Following the strategies discussed earlier on this page on ways to establish credit is your starting point.

How to Check Your Credit Score

One of the best ways to build credit is to check your credit score. This is easier now than it has ever been. Many banks and credit card companies supply customers with regular credit scores on their monthly statement or even more frequently. Some even give tips and advice on why a score went up or down.

Your credit score changes constantly, and if lenders are looking at it, you should be, too. Monitor your credit score to constantly take the pulse of your credit health. Seeing how the adjustments you make affect your score may be the only motivation you need to improve it.

If you are not being provided a credit score by your bank or credit card company, see if they have the service. There are also free credit score services, easily found online.

You can also get a free credit report once a year from each of the three major credit bureaus by visiting and requesting it. You can get one at a time every four months or get them all at the same time. Compare the information from one against the other two to be sure there are no mistakes.

Looking at your credit reports once a year is also a good way to get the big picture on how you use credit. The image of a nice green line of on-time payments can help you stay on track. The glaring red where payments were late is also a great visual to help motivate you to do better.

Get Professional Help Establishing Great Credit

Establishing credit history and building a good credit score opens a lot of doors financially and can make life easier in many ways.

You can build a credit history on your own, but a counselor at a nonprofit credit counseling agency like InCharge Debt Solutions can review your finances with you and help determine the best options to get your finances on track.

credit counselor is required by law to give advice that’s in your best interest and can help you find better ways to manage your money that will lead to building credit and establishing a good credit score.

If you are overwhelmed with debt and need help improving your credit, a credit counselor can also discuss how you can do that.

Establishing credit starts with understanding how to manage your money and finding ways to do it that work for your budget. A professional can help make that happen.

About The Author

Maureen Milliken

Maureen Milliken writes about personal finance and debt relief topics for InCharge Debt Solutions. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and has been writing about finance, real estate and business for more than 30 years. She also is is the author of three mystery novels and two nonfiction books.


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