12 Ways 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.
We’ll show you how to build a credit history in a moment, but first let’s define how the three major credit bureaus, Experian, TransUnion and Equifax, view people who don’t use credit, or maybe have used it a couple of times over a few years.
If you have no credit history – never used a credit card, haven’t had a car loan, never paid a mortgage — you are what the credit bureaus refer to as “credit invisible.” If you have occasionally used some form of credit – probably a credit card, but possibly paid off a loan of some sort years ago – you are considered “credit unscorable” because there is just not enough information to generate a credit score.
Surprisingly, there are 26 million Americans who fall in the “invisible” or “unscorable” categories, which really becomes a problem when they want to buy a car or home and need a loan to do so. Lenders will search for a credit report and because there is no information (or limited information), they 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 start using credit, you will have a good credit score and enormous advantages come with a good credit score. 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.
12 Ways to Establish Credit
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. This is a loan 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.
- Report rent and utilities payments to credit bureaus. 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.
- 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, you’re account could be turned over to a collection agency and that could be very damaging to your credit score. Paying on time is just a good personal and financial habit to form.
- 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 more than $300 worth of charges on it.
- Go easy on the number of cards. It’s obviously smart to start with just one credit card and add another later, at least six months later, if you need it. If you apply for two or three cards at the same time, it sends a signal that you might be getting desperate.
- Be aware of identity theft. Look at your monthly bills to verify that you are the one who made all the charges on it and not someone who has stolen your identity. You also can receive a free credit report from each of the major credit bureaus every year to make sure all the activity on it belongs to you.
- 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.
Brevoort, K., Grimm, P., Kambara, M. (2015, May) Data Point: Credit Invisibles. Retrieved from https://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-invisibles.pdf
NA. (2015, May 5) CFPB Report Finds 26 Million Consumers are Credit Invisible. Retrieved from https://www.consumerfinance.gov/about-us/newsroom/cfpb-report-finds-26-million-consumers-are-credit-invisible/
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/