Adulting is hard, and 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 in certain circumstances can affect your ability to get a job.
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 check. Alternatively, maybe you do have a history, but due to some poor decision-making, your credit is in the dumps. But fret not. There are a number of strategies you can use to build, maintain, and repair your credit.
How to Build Credit
1. Become an Authorized User
If you become an authorized user on a family member’s older 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.
But if you have a family member who’s in good standing with their finances and credit, this can be an easy first option, providing this person is willing.
“Being added as an authorized user of an older account is more likely to help someone with a short credit history boost their credit score,” says certified public accountant and financial analyst Riley Adams, who writes about personal finance for his website Young and the Invested.
“While this is a common strategy for improving credit quickly, the best option would be to ask a primary user with a long record of on-time payments,” Adams continues.
As an authorized user, you can make payments with the credit card. As such, 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; check the card issuer’s website to ensure that all authorized users are reported, and not just the original user.
Once you’ve generated a credit score and are in good standing, you might become eligible for your own card.
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 rented my own apartment at 22, I had a credit score of 720. This was enough to get me approved. My high score was due in large part to my ability to pay back student loans in a timely fashion.
This is because 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. If you’ve got a solid record of debt management, even without a credit card, you’ll be in a good place to continue building your credit.
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.
“Individuals with a limited credit history can stand to benefit from obtaining a secured credit card,” says Adams. “It’s also a good product for someone who is still developing good credit habits.”
A secured credit card is backed by a cash deposit, which serves as your credit limit. For example, if you deposit $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. But if you have cash on hand, a secured credit card can be a good option to build credit.
A secured credit card acts like any other credit card — you make purchases 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.
Often, a secured credit card can be provided by your bank. Wells Fargo, Citigroup, and Bank of America all provide options to their current members.
If you pay back your balance in full each month, after a certain period of time, you can close that account, get your deposit back, and graduate to an unsecured credit card, which doesn’t require a deposit.
Keep in mind that many secured credit card companies also send monthly reports to the three credit bureaus, but not all do. You’ll want to check the fine print (or review it with a financial planner) to ensure that your credit-building efforts will be well-documented and reflected in your credit score.
Finally, be aware that secured credit cards usually carry a small fee. This is frequently less than $50 a year, which is on the low end when you consider that you can apply even if you don’t have any credit history.
4. 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. 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.
“Much like applying for any unsecured credit card, you must be cautious and aware of the risks involved,” Adams advises.
“Having access to another line of credit presents added opportunity for spending. However, store credit cards can also be used to build your credit history if you make timely payments.”
Keep in mind that many of these cards can have high interest rates. As such, if you’re using a catalog credit card as a way of building credit, you’ll want to make sure you stay on top of payments to maximize their efficiency in boosting your credit score.
Once you boost your score, you may feel inclined to close out the account to avoid the temptation to spend. If you can exercise some self control, however, keeping these accounts open can help you build history and diversity within your credit portfolio.
“By maintaining these cards over long periods of time, it shows that multiple companies deem you as creditworthy,” adds Adams. “As long as you don’t have to pay an annual fees on a catalog card, leaving it open — and unused — is a great decision for building your credit.”
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. 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 (along with your credit report) 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 platform. 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 usually disregards them after about a year. While they can bring your score down by five points, they’re certainly something to look out for, especially during periods in which you’re trying to maintain the highest score possible.
4. Keep Track of Your Credit
Use free platforms to track your credit record. This way you can monitor any spikes or dips in your credit score and see where they came from without any additional costs.
How to Repair Credit
It’s possible that, despite your best inclinations, you may swipe your way into credit card hell. We all know someone — or have been the person — who has called to explain they can’t make the minimum payment on their credit card and probably won’t be able to do so for months.
If you find yourself in this situation, you’re certainly not alone. After all, the number of credit card balances becoming delinquent has been steadily on the rise since 2017, according to a report by the Federal Reserve Bank of New York. And the average credit card debt in the U.S. is $6,354 per person, according to Experian’s recent State of Credit survey.
The same survey found that while an increasing number of Americans have excellent credit scores, more than 20 percent have subprime scores.
A Lesson in Credit
Many of us think that the longer we can’t pay our credit card debt, the lower our score will go, and there’s nothing we can do to stop it. These fears are often compounded during long periods of unemployment.
Ironically, those with an average credit track record will likely see gentler drops compared to those with spotless track records.
“The stronger your credit score is, the more likely it is to drop significantly,” according to credit expert Gerri Detweiler, Head of Market Education for Nav. It’s odd that the A-plus student would be more in jeopardy than the person making all Cs, but that’s the way the cookie crumbles when it comes to credit scores.
The people with more of a history of negative information often see less of an impact to their scores when they miss minimum payments. But there are still actionable steps you can take to rebuild your previously stellar credit score.
How to Rebuild Credit
Detweiler believes that the biggest problem many people face is struggling for too long before reaching out for help. She recommends reaching out to a credit counselor or even a bankruptcy attorney to ask about options.
You don’t have to suffer for months, afraid to look at the monthly statements or ignoring the collection calls. Instead, be proactive and reach out to a qualified professional who may show you a way out of what you see as an impossible situation.
Here are some ways to rebuild your credit.
1. Credit Builder Loan
Taking out a small credit builder loan can help you rebuild your credit score if you can’t pay back your minimum payment. With a credit builder loan, you’re essentially “borrowing” against a savings account. Once you’ve paid off that account, you’ll have access to the money in the savings account. “It’s a way to credit repair and acts as a savings account,” Detweiler says.
As time passes, the minimum payment can inflate to a number we can’t pay. Taking out a small credit builder loan and making small minimum payments on it can increase your credit score despite the state of your credit card debt.
But, Detweiler cautions, “don’t spend a large amount of money on a temporary solution.”
If you know the $300 in your pocket won’t get replenished in the following months, and this month’s payment will be the only one you can make for a while, it’s better to seek help elsewhere. Therefore, you’ll want to try to keep your credit builder loans on the smaller, more manageable side.
2. If All Else Fails, Settle
“You can always try to negotiate to pay less than the full balance,” Detweiler says. The further you fall behind, the happier lenders are to work with you, since the likelihood of getting paid drops as the debt gets older.
Settling debt for less than the full balance will impact your credit score. There may also be tax implications, as the IRS may consider forgiven debt to be taxable income. Still, it can serve as a way to put your debt behind you and get a fresh start.
The Bottom Line on Building or Rebuilding Your Credit
Don’t wait until your rent or mortgage application gets denied to look for solutions. Research the possibilities. Then, if you’re still not sure how to best rebuild credit on your own, seek professional help.
Everybody makes mistakes and encounters problems outside of their control. But thankfully, there are fixes that can get you back on track, and the sooner you start, the better. And once you’ve settled your existing debt, by employing time, patience, and financial prudence, you’ll have a 700 (or even 800) score before you know it.