If you have no credit history, you may have a low or nonexistent FICO credit score (the three-digit number that financial institutions use to determine a person’s creditworthiness).
Unfortunately, a good credit score is necessary for many common situations: trying to get a car loan, getting a credit card, or passing on an apartment rental application, to name a few.
Trying to build a good credit score from scratch is like trying to get a job with no experience. It’s a catch-22 – to build credit you need to borrow money, and in most cases you need a decent credit score to borrow money.
So, how can you start building credit from scratch? Try one of the four options below. They’re not mutually exclusive, so trying a few at a time will help you score faster.
Remember: build and use credit does not spend more money than you have. Credit can be a double-edged sword, so do your best to avoid spending more than you can pay back.
1. Become an authorized user of someone else’s credit card
To use credit (ie to be the primary account holder of a credit account such as a personal loan or credit card), a person must be at least 18 years old. However, there is a way even people under the age of 18 can get a head start on their credit-building mission, assuming they have an adult friend or family member who trusts them enough to risk their own credit score.
Many credit cards allow (and encourage) account holders to add “authorized users” to their accounts. An authorized user is a trusted individual who has been granted access to an account holder’s line of credit. This allows the authorized user to bypass the credit scoring requirements typically required for credit card approval, so that they can take advantage of the account holder’s on-time payments.
Only the primary account holder is responsible for credit card payments, but payments are typically reported in the name of both to the three major credit bureaus (Experian, Equifax, and TransUnion). This allows the authorized user to collect a credit history, which forms the basis of a credit score.
- Such a relationship can be risky for both parties. An authorized user is not required to carry a card or make purchases to take advantage of a primary account holder’s on-time payments, but it is legal to do so, despite the latter bearing all the liability.
- A primary account holder may remove authorized users from their credit account at any time by contacting the account administrator.
- If the primary account holder misses payments or fails to keep their credit card usage relatively low, the effect on the authorized user’s credit score could be negative instead of positive.
2. Get a secure credit card through your bank
A “secured” credit card account is so called because it is secured (on the bank’s side) by a cash deposit by the account holder and held as collateral by the bank.
In other words, you give your bank a sum of money, say $300, and they give you a credit card with a limit of $300. You spend money with the card and then make timely payments, which the bank then reports to the agencies. , so you can build credit over time.
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The bank doesn’t have to worry about you defaulting on your balance because it already holds the maximum amount you are allowed to spend. If you do not pay your balance, the bank will pay itself with the money you have deposited as collateral.
With a secured credit card, you are essentially spending money that you have borrowed from yourself to establish credit history.
- As long as you make your payments, the deposit you use as collateral must be returned to you after a certain period of time or if/when you close the account. Try to keep the account open if possible, as the length of your credit history affects your score.
- Secure credit cards often have higher interest rates than traditional cards, so it’s best to pay off your balance in full each month to avoid interest.
- Some secure cards come with a maintenance fee.
3. Take out a credit building loan with your bank
A lender loan works the same way as a secured credit card. You take out a loan for, say, $500, but you don’t use it – your bank keeps that money in a collateral account.
You then use your income to pay off the balance step by step over, for example, a year. These payments are reported to the agencies so that you can build up credit.
When the loan is paid off, your bank releases the $500 from the collateral account and returns it to you. Or, better yet, if you don’t need the money right away, you can use it as collateral for a secured credit card (see point 2 of this list).
- Credit-building loans charge interest, so by taking out one, you’re essentially paying to build credit.
- Any missed payments will be reported to the credit bureaus after 90-180 days and will negatively impact your credit score.
4. Use a service to report rent and bill payments to credit bureaus
Rent and bill payments are usually not reported to the credit bureaus unless they are unpaid and go into collections. In other words, paying on time won’t help you build credit, but not paying can certainly hurt your credit.
Today, however, certain services exist that allow tenants and bill payers to report their payments to the three bureaus — usually for a monthly fee — to help them build or improve their creditworthiness.
By creating an account with a data provider such as LevelCredit or PayYourRent, you can pay to share your monthly rent payments with the credit bureaus. Another service, known as Experian Boost, allows you to report other bill payments (such as phone, utilities, and even streaming services like Hulu), albeit only to Experian, one of the top three credit bureaus.
- Some of these services cost money, and it’s up to you to decide if the benefits are worth the price.
- Since rent and utility payments aren’t as heavily used as loan and credit card payments in credit reports, it’s unclear how much of an impact reporting this information will have on your score.
General tips for building and maintaining good credit
- Pay your bills on time: By far the most important factor in maintaining good credit is paying your bills on time, especially credit card and loan payments. Set up autopay where possible.
- Leave accounts open: Your credit age — how long you’ve successfully borrowed and repaid money — affects your score. Don’t close credit card accounts just because you don’t use them anymore. If you leave them open (as long as they don’t charge an annual fee), you benefit.
- Maintain multiple credit accounts: One factor that affects your credit score is your credit utilization – this is the ratio of the total money you owe to your total credit limit. The lower this ratio is, the better it is for your score. Even if you only use one credit card, having three credit card accounts open with no balance is a good way to minimize your usage.
- Do not apply for too many lines of credit at once: When you apply for a credit card or loan, it will appear as a “hard request” on your credit report. This is okay, but too many questions in a short period of time can temporarily lower your score. If possible, try to delay applications by a few months.