How to Build Credit When You Have No History
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 whether you can get approval 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:
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.
“If you know anyone that has a strong credit profile, like a parent or older sibling, asking to become an authorized user on their account can really help your credit profile and show activity,” says Sa El, co-founder of Credit Knocks, a credit information and review service.
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.
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 had only 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 a kind of installment loan and are part of your credit portfolio. The key is to borrow only what you need and to make on-time payments each and every time you borrow.
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. However, these aren’t always guaranteed.
“You still have to be approved for a secured card, and it can be hard to get approved for these if you don’t have any credit at all,” El says.
But if you do get approved, this can be a very solid way to build your credit. The secured credit card acts like any other credit card — you buy things and make payments. But of course, if you don’t make payments on time, 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.
Pro tip: Capital Bank offers the OpenSky Secured Credit Card. You don’t need a credit score or bank account to apply for it, which is hugely beneficial if you have a low credit score or no credit at all.
You can put down a deposit as low as $200 or as high as $3,000 for the card. OpenSky also sends monthly reports to the three credit bureaus: Equifax, Experian, and TransUnion. It does have an annual fee of $35, but that’s on the low end when you consider that you can apply even if you don’t have any credit history.
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 even if you have 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 (CD) for you for a year.
“This option is great for people that don’t have any credit. It gives you the opportunity to put money into an account and get a loan that will report to your credit, and once you pay the loan off, your money is given back to you,” says El.
So 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 basically paid yourself back and can unlock the funds in the CD savings account. Essentially, you’re saving money and also boosting your credit, a clear win-win situation.
5. Apply for a Catalog Credit Card
Catalog credit cards are specific to the company that issues them and aren’t affiliated with a network such as Mastercard or Visa.
“These are accounts where you only can use your credit with the specific company. Accounts like these still report to the credit bureaus and give you the ability to establish credit,” El says.
Basically, they’re cards that you use for purchases from a specific store, such as Forever21 or Macy’s. However, some catalog cards come with many fees that can eat up a chunk of that credit limit and may have higher interest rates or late fees than traditional credit cards, so be sure to stay on top of payments.
How to Maintain Credit Once You’ve Established It
1. Pay Your Bills on Time
Your payment history plays a huge role in your credit report. Issuers and potential lenders use it to judge how likely or unlikely you are to repay them should they choose to allow you to borrow. In fact, it makes up 35 percent of your FICO credit score. Your FICO score is a three-digit number that credit companies and potential lenders use to judge your likeliness to repay them.
Making on-time payments shows lenders that you’re a responsible borrower, and on-time payments bolster your credit score. 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.
2. Keep Balances as Low as Possible
Having a high outstanding debt on a credit card can negatively affect your credit score. Once your balance exceeds 30 percent of the limit on your card, you may notice your score beginning to drop.
If you regularly max out your credit cards, your credit score can drop significantly.
Although it isn’t included in your credit score, your credit report may list a “high balance,” which is the highest balance you ever charged to that card. Anyone who looks at your credit report will know you once had a high balance on that card, and they will have no knowledge of how quickly you repaid that debt.
3. Pay Attention to Hard vs. Soft Credit Checks
Soft credit checks usually come from a free online program such as Credit Karma. These don’t affect your credit score.
Companies usually do hard checks when you’re applying for a loan or credit card. These are ordered from one of the three major credit bureaus and stay on your credit report for two years. FICO may disregard them after about a year. Hard credit checks could potentially bring your score down by a few points.
4. Keep Track of 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 a loan. Another common myth is that carrying a balance is good for building credit. Not so, my friend!
Using these tips, you can build credit even when you have none — and open up more opportunities, rather than limit them.