Trying to build credit when you have none is no easy task. But here’s the problem—to get credit, you need to have credit. So, you probably feel like you’re in a catch-22 situation. If you want to rent a place, get a car loan, or apply for a credit card, you’ll need a good credit score. But how are you supposed to establish your credit if no one’s going to give you credit?
If you’ve just left school or college, you’ll have to start building credit from scratch. Or, you might be leery of getting any kind of credit. We’ve all heard horror stories of people burdened with high-interest credit card debt and going bankrupt. Don’t worry—there are responsible ways of getting a good credit score without risking your finances. In fact, a good credit score can be a way of securing your financial future.
We’ll share with you the secrets on how to build your credit when you have none. This knowledge can help you secure your first loan, first apartment, or even help you get a job.
Why You Need to Build a Credit Score
Basically, you need to establish credit to prove to lenders you’re not a risk. Having a good credit score shows you have a history of repaying your debts and paying bills on time—apart from your income—basically, this is all a bank needs to know about you.
You don’t just need good credit when applying for a loan or a credit card. Here are a few reasons to think seriously about building a good credit score:
- Get better interest rates on your credit card and loan payments
- Get approved for a mortgage
- Have more credit card options, such as signup bonuses and cashback rewards
- Have the ability to sign a rental agreement with a landlord
- Obtain the necessary utilities—some utility companies run credit checks before connecting utilities
- Secure a good job—many employers check credit scores before hiring for certain positions
You should remember that building credit has nothing to do with your finances. For example, you can have a great, high-paying job and still have no credit score. A lender isn’t going to approve a mortgage if you’re in the “invisible” or “unscorable” credit categories—even if you pay your bills on time. That may not seem fair, but it’s the way things are. If you play the game right, you can still win.
No credit vs. bad credit
There is also a difference between having bad credit and no credit score at all. While you’ll probably be refused a loan in both circumstances, lousy credit shows you’ve borrowed money and not repaid your debts. Lenders will be wary of approving any loans until you fix your credit score.
Ways to Build Credit When You Have None
The sad truth is that lenders treat responsible people with no credit the same as someone with bad credit.
Let’s look at four fast ways to build a good credit score without getting into uncontrollable debt.
1. Apply for a secured credit card to build credit
The easiest way to start your credit history without risk is to apply for a secured credit card. It works this way—you pay a cash deposit on the card, and this becomes your credit limit. If you fail to make a payment, the bank taps into your deposit. A secured credit card avoids the risk of running up huge credit card bills and defaulting on payments.
To start building your credit from scratch, use your credit card to buy things you would normally, like gas or groceries. Then, at the end of the month, pay off the balance in full. After a few months, your credit score will start to rise.
Your goal is to get your credit score high enough to qualify for an unsecured credit card. These tend to have greater benefits. For example, you could get a cashback credit card that rewards you with cash when you use your card. Remember to use your card responsibility and never purchase high-price items that stretch your finances.
A word of advice with secured credit cards: make sure the lender reports payments to all of the three credit bureaus—Experian, Equifax, and TransUnion. Also, shop around for secured credit cards that don’t charge an annual fee.
2. Get a credit-builder loan
To help get you started, some lenders offer credit-builder loans. As you’d expect, these are issued to help you get a good credit score.
So, how do these loans work? The lender puts the money you borrow into an account. You then make payments until the loan is paid off in full. During this time, the lender reports these payments to the credit bureaus. When you have paid off the loan in full, you get your funds, and your credit score gets a nice boost.
To find where to get credit-builder loans, check out credit unions or community banks.
3. Become an authorized user to start building credit
If you’ve just turned 18 and want to build credit, you could become an authorized user of your parent’s credit card. Their good credit history will count toward your credit score. Of course, you need to make sure that they’ve got a good credit score. Also, they need to trust you enough to make you an authorized user. But this can be the first step in your journey to starting your credit history.
But be careful: if you go crazy with the card and rack up a lot of debt, your parents are ultimately responsible for paying. The last thing you want is for their credit to take a hit.
The good news is that in some cases, you don’t even have to use the card to benefit. So, check out with the credit card provider if they report authorized users to credit rating bureaus.
4. Build credit with utilities you pay
You can even build up your credit score using the rent and utilities you already pay. For example, signing up for Experian Boost allows your utility payments and cell phone bills to be calculated in your credit score. Reporting your utility payments is one way that your excellent financial activity can boost your credit score.
Also, check out rent-reporting services that put your rent payments on your credit report.
Building Your Credit Score with No Credit History
You can create a good credit score fast by using a secured credit card, taking out a credit-builder loan, and using your utility payments to boost your score.
Now that you’ve taken your first few steps on your credit journey, you don’t want to trip up along the way. One late payment or maxing out on credit cards will damage your credit reputation. As a general rule of thumb, never use more than 30% of your credit card limit and, if possible, pay off the balance each month. In time you will build up a good credit score, which allows you access to larger loans or mortgages at lower interest rates.