Building a good credit score takes time and is one of the most important factors for your financial future. When it comes to things like a car loan, home mortgage, credit card rates + limits, leasing an apartment, and more; your credit is the metric that lenders will look at first and foremost. So starting to build credit from an early age can really set you apart and get you started on a strong financial journey with a good foundational credit score.
But building credit can be tricky without a credit history. Because of no credit history, you may be considered a “credit ghost” and that means lenders have nothing on record to look at regarding your financial history. This means that they will almost always deny your application or approve it at incredibly high-interest rates. This could be a way to build credit but it’s riskier with great financial threat should you be unable to make payments which will not only put you in debt but also really hurt your credit score.
Building a Credit History
There are a few different ways to start building credit if you have no current credit history and cannot get approval for a traditional credit card. Here let’s look at some of those avenues available to you.
Set Up a Secure Credit Card
A secured credit card is one of the smartest ways to start building credit from nothing. It’s essentially a credit card that is backed by a cash deposit you make upfront and at the beginning. That deposit amount will then be your credit limit. So if you deposit $200 to set up the secured card, $200 is your monthly limit.
Then you simply use the card like any other. Make purchases, pay your recurring bills like cell phone, or on anything else. Then you pay your balance off at or before the exact due date (if you don’t you’ll start to accrue interest). When you’ve built up your credit after a while by making on time monthly payments and you’re ready to get a traditional credit card, you simply close out the secured credit card and get back your initial deposit, whatever amount that may be.
Credit Building Loan and Secured Loans
These loans are designed specifically to help you build credit. The way it normally works is you actually pay off the entire loan before receiving the funds. You make monthly payments towards the loan total which are reported to the three major federal credit bureaus. Typically these are offered more frequently by community banks or credit unions as opposed to large national banks. This can also be done sometimes through the money you already have in the bank. In this variety, they use the money you have in your account as collateral. The rates are often hire than a credit-building loan but it is an option.
Co-Singers and Authorized Users
Using a co-signer can help you get approval for a traditional credit card or traditional loan. If your co-signer has a good credit score and is willing to take you on, you can get approval and start building credit through monthly payments. But they should be aware if you’re unable to pay they are then required to pay the full amount, and vice versa.
On the other hand, becoming an authorized user on a family member’s credit card can be an option. What this does is start reporting the credit card history into your personal credit history. If the primary user has a long history of good credit standing and who doesn’t pose a risk of missing monthly payments, it can be a great option to start building credit. The thing is you don’t even need to use the card you have. Just by being an authorized user on an account that is building credit, you start to build credit.
But be sure that the card company reports authorized users to the credit bureaus as some of them do not. If they don’t you won’t be building any credit. But don’t go crazy, even if it’s a family member you may be on the hook to pay back what you’ve purchased. Even though that sounds reasonable enough many young people have put themselves or a loved one in debt by using a card extravagantly.
Earn Credit for Bills you Already Pay
Nowadays you can actually build credit for showing things you already pay for monthly such as cell phone bills, utility bills, even rental payments. Rent-reporting services like Rental Kharma help you build a positive credit history when you make on-time rental payments. Other options like Experian Boost offer a system to build your credit for simply showing your cell phone and utility bill payments. This is a great way to start boosting your credit especially if you’re a credit “ghost” and have no credit history.
Start and Keep Smart Credit Habits
The most important thing to a good credit score is maintaining smart credit habits and building your history of on-time payments. FICO scores don’t show up until you’ve had an account (like a credit card) open for a minimum of 6 months. So it’s about getting started and keeping going. Here is the best credit-building habits you need to start and maintain:
- On-time payments – with all your credit accounts like credit cards and any loans you may have or other items like cell phone bills. This is the most important factor to building credit.
- Don’t apply for multiple credit cards or loans at once – these lenders will do what is called a “hard inquiry” onto your credit report and if denied approval shows up badly on your credit report. So don’t go about applying for 15 credit cards at once just to see if you’ll get approval. That will undoubtedly hurt your credit score.
- Keep credit utilization low – it’s a smart idea to use less than 30% of your available credit. If your limit is $10,000, use less than $3,000.
- Don’t close credit accounts unless you must – keeping an account open will help your credit but often closing one will hurt if you don’t have another one lined up.
Know Your Credit Score & Monitor Your Report
It’s important to know your score and monitor your credit report, especially when trying to build your credit score. Using a free website like Experian or personal finance websites like FreeCreditReport.info you can get access to all of this information. This way if you’re trying to build credit you can see your progress and also learn where you can make up ground. You should be checking this at least once a year but it’s smarter to do it more often, using a credit monitoring service is never a bad idea.