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For many people, building credit can seem like a Catch-22: You need good credit to apply for many of the best loans and credit cards, but you can’t establish credit without those loans and credit cards.
Many lenders don’t want to take the risk of extending credit to someone with no history of repaying credit. While their logic makes sense, it doesn’t help the roughly 26 million Americans who have no credit history with a nationwide consumer reporting agency.
Thankfully, you may have more options to start building your credit than you might think.
Getting a secured credit card can be a good first step, but even if you don’t feel ready to apply for your first credit card, there are plenty of other ways to get started on your credit journey. In the following guide, we’ll explore some of those ways in detail and answer any other questions you may have about building credit.
You’ve got to start somewhere. The first step to building credit is knowing where you stand.
Keep in mind, though, that you may not have credit scores if you just opened your first account. You need to have at least one account open for six months (and at least one undisputed account reported by a creditor) before it can be used to calculate a credit score.
Get a parent or close friend to co-sign a loan
If you’re in need of a loan in the immediate future but have no credit history to speak of, your best shot at getting approved may be to get a co-signer for your loan.
“Having a co-signer can move you up on the scale as far as creditworthiness,” says Justin Lavelle, chief communications officer of the online background check platform Been Verified.
Why does this matter? Because a co-signer guarantees the loan, generally meaning they’re on the hook to pay back any money owed if you can’t. Since this lowers the lender’s risk, it can help you get approved for a credit card or loan even if you have little or no credit history.
Of course, not just any co-signer will do the trick. If you have no credit, you’ll want a co-signer with excellent credit to help you qualify for a low interest rate. Co-signers with less-than-excellent credit may still help you get approved for your loan, but you may end up having to pay a higher interest rate.
How to find a potential co-signer
Finding a co-signer isn’t always an easy task. The co-signer’s credit is potentially on the line should you make a misstep, so many people are understandably reluctant to co-sign any loan. Your best shot at finding a co-signer usually lies with your family or close friends.
But remember: Just because these people know your deepest secrets doesn’t mean they’ll be convinced of your financial responsibility. Here are a few things you can do to help put a potential co-signer’s mind at ease:
Present a plan on how you plan to pay off the loan. Show any money you’ve set aside in your budget. You may also want to draft a detailed payment schedule to show that you’ve given serious thought to your loan application.
Offer a refundable deposit in case you can’t make a payment in the future. If you can’t make a payment, the co-signer can make the payment and avoid hurting anyone’s credit scores with a late or missed payment. Ideally, this isn’t a situation that would ever play out in real life, but it could give your co-signer some extra peace of mind.
Don’t forget to talk to potential co-signers about their credit before you ask them to co-sign your application. If they don’t have healthy credit, you may get denied for the loan anyway.
Apply for a secured credit card
If you don’t need credit immediately but want to start building your credit for the future, a secured credit card could be a great option for you.
Secured credit cards are called “secured” because they require a cash deposit that serves as collateral if you miss a payment. In most cases, the deposit will also serve as your credit limit.
After you’re approved and have put down at least the minimum deposit, a secured card works similar to an unsecured credit card: You make charges and pay off the balance. The big difference is that the security deposit is available to the credit card company in case you default. This lowers the company’s risk, since it can take any money you owe out of the deposit it already holds. If you do ever owe more than your security deposit, you’ll still owe the difference even if the lender seizes your deposit.
What should I look for in a secured credit card?
Secured credit cards sometimes get a bad rap because many of them charge a wide range of fees and higher interest rates than you might see with a typical unsecured card. Thankfully, not all secured cards fit that stereotype.
In fact, there are quite a few secured credit cards that don’t come saddled with loads of fees and sky-high interest rates.
When shopping for a secured credit card, make sure you understand the fees and interest rates you may be charged. If you can, find a card that doesn’t charge an annual fee — and make sure the credit card company reports to all three major consumer credit bureaus, which can help you build credit with responsible use.
And remember: If you spend responsibly and pay off your full balance on time each month, you can avoid being charged interest on your purchases.
“Charging purchases to a credit card is something you can do without accruing interest, so long as you pay off the balance on time and in full,” says Eric Roberge, Certified Financial Planner™ and founder of the financial planning firm Beyond Your Hammock.
One last thing: Before applying, make sure you actually qualify for the card you’re applying for. Some cards list qualifying factors in their terms.
Credit card companies that offer secured credit cards typically report your payment history to the three major credit bureaus. This can give you a big lift in your credit-building journey. If you have any doubt at all that your payment history will be reported, don’t hesitate to ask.
Apply for a credit-builder loan
The main purpose of credit-builder loans is to build your credit. Typically offered by credit unions, these small loans (typically less than $1,000) aren’t really loans at all — at least not in the traditional sense.
Here’s how they work.
- First, your financial institution deposits the loan amount into a “locked” savings account you can’t access.
- Over the next six to 24 months, you pay off the loan just as you would with any other loan.
- Once the loan is fully paid off, the accumulated money is returned to you in total.
While these loans may seem pointless at first glance, they can be powerful credit building tools. Your payments are reported to the credit bureaus, and responsible payment over time can help to build your credit. Small, local banks and credit unions are more likely to offer credit-builder loans than big banks because these smaller institutions are generally more invested in building up their local communities.
To get started, check with local banks and credit unions to see if they offer a credit-builder loan you qualify for.
Become an authorized user
If your parents, a significant other or a close friend makes you an authorized user on their credit card, you might see a small credit boost.
This method isn’t guaranteed to work, as not all credit card companies report authorized users’ activity to the major credit bureaus in a way that will help them build credit. Sometimes, an authorized user’s activity is simply reported on the main cardholder’s credit reports. But you may still want to try it out anyway, because in many cases your activity as an authorized user will be added to your own credit reports.
There are some other caveats to look out for too.
You’ll only want to be added to a card as an authorized user if the account is in good standing. As an authorized user, late payments and high credit card utilization rates may count against your credit scores if they’re reported.
If your scores end up getting hurt by being an authorized user on someone else’s credit card account, you can request that the account be removed from your credit reports after you’ve been removed as an authorized user on the account.
Also, keep in mind that some credit cards charge an annual fee for authorized users.
How to get added as an authorized user
Getting added as an authorized user on a credit card account is usually pretty easy. The primary cardholder will typically have to log into their account and find the page to add an authorized user. If the cardholder would prefer not to add an authorized user online, the cardholder can call the phone number on the back of the credit card to add an authorized user over the phone.
Credit card companies normally request the name and birthdate of the authorized user, at a minimum. Sometimes they’ll request the authorized user’s Social Security Number as well. Some banks allow the cardholder to customize access for authorized users, while others do not.
The hardest part of getting added as an authorized user may be convincing the primary cardholder that it’s a good idea. If you run into that problem, try using some of the tips we mentioned in the Quick Guide above on “How to find a potential co-signer.”
Get your rent payments reported to the credit bureaus
Mortgage payments usually show up on your credit reports. Unfortunately, renters don’t typically enjoy the benefit of having their payments show up on their credit reports.
In fact, most landlords don’t report rent payments to credit bureaus at all. Thankfully, there are ways to get your rent payments reported on your credit reports — but it will likely cost you.
How to get your rent added to your credit reports
Before you go out and pay a company to report your rent payments to the credit bureaus, make sure your landlord doesn’t already offer the service.
“Some property management companies will report your payments to the credit bureaus, but individual landlords may not offer to do so on behalf of their renters,” says Roberge. If your landlord doesn’t, ask if it can be done. Remember, it never hurts to ask.
If your landlord doesn’t report your rental payments, it’s time to find a service that reports your payments to the credit bureaus on your behalf. Ideally, you’ll want your payments reported to all three major consumer credit bureaus, but some services only report to one. Look for a service like RentTrack, which clearly states that it reports to all three major bureaus.
Once you select a service, you’ll need to sign up. This may require verification of your identity and your landlord’s information. Once signed up, you’ll make payments to your landlord through the rent reporting service to ensure that the payments are reported on your credit reports. Some services can add past months’ rent payments as well.
While applying for a secured credit card or a credit-builder loan may be the first steps on your journey to building credit, they definitely aren’t the last.
If you want to see continual improvements in your credit health, you’ll need to make sure you use credit responsibly. That means paying attention to all the factors that go into your credit scores. Here are a few tips to help keep you on track in five major factors: your payment history, amount owed, the length of your credit history, your new credit accounts and your credit mix.
While different credit scoring models weigh factors differently, payment history is generally a high-impact factor. Late or missed payments can have a real impact on your credit scores, so always try to pay your bills on time. If you can’t pay off all your credit balances in full each month, at least make the minimum payment to avoid a late fee.
This factor refers to your credit utilization, or how much of your available credit you’re using at a given time, and your total balances owed. Credit utilization is calculated by dividing your total credit card balances by your total credit card limits.
Most experts recommend keeping your credit utilization below 30%. Doing this suggests to lenders that you don’t spend outside your means and can use your credit responsibly.
Length of credit history
If you’re just getting started building credit, there isn’t much you can do to affect the length of your credit history. However, going forward, you’ll want to seriously consider keeping your oldest credit line open to keep the length of your credit history from shrinking.
New credit accounts
“Too many [hard] inquiries into your credit can actually lower or damage your score[s],” says Lavelle.
Lenders typically don’t like to see you open multiple new accounts in a short period of time, because it suggests a higher risk of potentially defaulting on a loan. While you need new credit to build your scores, focus on opening just one account at a time rather than many all at the same time.
Basically, credit mix looks at the different types of credit accounts you have open. These may include credit cards, installment loans, mortgages and other types of credit.
As someone new to building credit, you shouldn’t take out a loan simply to fulfill the credit mix portion of your scores. Over time, you’ll slowly build this small portion of your scores as you progress through life’s big events, such as buying a car or a home.
Building credit without first having credit is frustrating. It seems like a Catch-22 you simply can’t escape.
Rather than getting frustrated and just giving up, use the tips we laid out above to begin establishing credit. As soon as you open your first credit line, make sure you make payments by their due date to help improve your credit over time.