How to Build Credit When You Have No History
There are alternative ways for young adults to build credit.
Adulting is hard. If you have no credit history, it can be even harder. Your credit history plays an important role in your adult life. It rules getting approved for everything from an apartment to a credit card, a car loan, and more.
Lenders want to know how reliable you are when it comes to paying back money; and if you have no history, you may not have a credit score for lenders to refer to. Luckily, there are ways to change your situation. Here’s how to build credit, even if you have no history:
- Become an authorized user on a family member’s credit card.
- Make regular, on-time student loan payments.
- Get a secured credit card.
- Use a credit-booster account to both save and build credit.
- Pay all of your bills on time.
Tip #1: Become an Authorized User
If you become an authorized user on a family member’s card, you can benefit from the primary cardholder’s good credit. Of course, the primary cardholder needs to make their payments on-time in order for you to benefit from this. But if you have a family member who is in good standing with their finances and credit, this can be an easy option.
As an authorized user, you can make payments with the credit card, so it’s important to come up with an arrangement that works for both you and the primary cardholder. Make sure that the credit card issuer reports your activity to the credit bureaus. Once you’ve generated a credit score and are in good standing, you might become eligible for a card of your own.
Tip #2: Take Advantage of Student Loans
If you’ve taken out student loans for college, you can build credit by making on-time payments.
I didn’t have any type of credit card until I was 28 years old. Up to that point, I only had student loans in my credit portfolio.
When I was 22 and rented my own apartment, I had a credit score of 720 — enough to get me approved.
Student loans are considered a kind of installment loan, and are part of your credit portfolio. The key is to only borrow what you need and to make on-time payments each and every time you borrow.
Tip #3: Apply for a Secured Credit Card
It’s often difficult to get approved for a credit card if you don’t have any credit. If you can’t get approved for a traditional one, a secured credit card may be a good option.
A secured credit card is backed by a cash deposit, which serves as your credit limit. For example, if your deposit is $500, your credit limit will be $500. The problem with this setup is that if you’re just starting out on your financial journey, it may be tough to save up the cash you need for the deposit. If you have cash on-hand, a secured credit card can be a good option to build credit.
The secured credit card acts like any other credit card — you buy things and make payments. If you don’t make payments, you will accrue interest. Your cash deposit will then be used if you don’t make the required payments.
If you pay back your balance in full each month, then after a certain period of time, you can close your account, get your deposit back, and graduate to an unsecured credit card, which doesn’t require a deposit.
Tip #4: Open a Credit-Builder Account
One persistent myth is that you must have a credit card to build credit. But as my story shows, you can get good credit with only student loans and the like. And there is another way to build credit without a card: a credit-builder account. For example, using a service like Self-Lender, you can apply for a credit-builder account. Through this kind of account, Self-Lender puts money in a Certificate of Deposit (or CD) for you for a year.
For 12 months, you make equal payments to pay back your loan. These will be reported to the credit bureaus in order to generate a credit score. At the end of the year, you’ve essentially paid yourself back, and can unlock the funds in the CD savings account. Essentially, you’re saving money and also boosting your credit. A win-win!
Tip #5: Pay Your Bills on Time
Your payment history plays a huge role in your credit. In fact, it makes up 35 percent of your FICO credit score. Making on-time payments shows lenders that you’re a responsible borrower. Even if you don’t have much credit, it’s important to pay all of your bills on time. If you don’t pay your rent or you miss any bill payments, it could hurt your credit.
Final Thoughts on How to Build Credit
You’ll also want to be mindful of how much you’re borrowing. Keep any balances low if you do end up with a credit card or loan. Another common myth is that carrying a balance is good for building credit. Not so, my friend!
Using these five tips, you can build credit even when you have none — and open up more opportunities, rather than limit them.