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How to Build Credit With No Credit History
Your credit history directly impacts your financial opportunities. Along with your debt-to-income ratio, it’s one of the most important factors that lenders look at when they review your loan or credit card application. To add to its significance, your credit history can also impact your ability to rent an apartment, receive affordable insurance rates, and get hired for certain jobs.
Unfortunately, not everyone has had the chance to establish a credit history. One out of ten American adults is adults is “credit invisible,” which means that they don’t have any credit history. You may find yourself in this situation if you haven’t used credit yet due to:
- Young Age
- A recent move to the United States
- A preference to pay with cash and debit cards
While having no credit could be considered better than having bad credit, it still makes it more difficult to qualify for various forms of financing. This highlights a tricky Catch-22: It takes credit to build credit.
Fortunately, there are ways to get around this predicament. Below, we’ll discuss seven of the best ways to build credit with no credit history.
What is Credit History?
Your credit history is a compilation of all your credit-related information. It includes:
- A list of all your open and closed credit accounts
- The types of credit accounts you have (revolving, installment, mortgage, or open line of credit)
- The balance you currently owe on each credit account
- Your payment history (which payments you’ve made on time, which ones you’ve paid late, and which ones have gone to collections)
To develop a positive credit history, you need to make your payments on time and, ideally, build a varied portfolio of credit accounts over time. These traits show potential lenders that you are a responsible, experienced borrower.
Once you’ve built up a great credit history, lenders will feel more comfortable offering you a loan. They’ll also be more willing to offer you favorable terms, such as lower interest rates and larger borrowing limits.
If you don’t have any credit history yet, you’ll need to find other ways to assure your lender of your creditworthiness.
How is Credit History Reported?
Before we jump into some credit-building techniques, it’s important to understand that these tactics will only help you establish credit if your lender reports your credit activity to the credit bureaus. If your credit activity goes unreported, it won’t help you build your credit history.
Thus, before you use a specific credit-building tactic, make sure that your lender reports all of your credit activity to the three major credit bureaus:
Sometimes, lenders report credit activity to one or two credit bureaus, rather than all three. As a result, your credit history may vary slightly from one credit bureau to the next. That’s where tri-merge credit reports come in handy. These credit reports combine all of your credit activity from the three major credit bureaus.
7 Ways to Build Credit With No Credit History
Now that you know what credit history is and why it’s so important, let’s review seven tried and true tactics you can use to establish a credit history from scratch.
#1 Apply for a Secured Credit Card
Secured credit cards are made specifically for borrowers looking to build credit. These credit cards are secured by a cash deposit, usually of $200 to $500. The amount of cash you deposit determines your credit limit. In this sense, secured credit cards work similarly to debit cards—you can only spend up to the amount of cash you have linked to the account.
Once you receive your secured credit card, you can start using it like a regular credit card. You’ll be required to make payments on it each month. All of your credit activity will be reported to the credit bureaus, so it’s crucial that you make your payments on time. If you miss a payment, your lender can take money from your cash deposit to recoup what they’re owed.
If you manage your secured credit card properly, you can build up your credit history and qualify for even more financing opportunities in the future. For instance, your lender may allow you to transition to an unsecured credit card down the line. If they do, you’ll get your money back from the deposit.
#2 Apply for a Student Credit Card
If you’re a student, you can kickstart your credit history with a student credit card. Since these credit cards are made for young people, they typically have very lenient credit history requirements.
Compared to regular credit cards, student credit cards also have:
- Lower credit limits
- Higher interest rates
- Fewer fees
- Student-oriented rewards
As long as you use your student credit card responsibly, it can help you build your credit while you earn your degree. Just make sure that you only spend what you can afford to pay off each month and make your payments on time.
#3 Apply for a Store Credit Card
If you’re no longer a student, you can look into store credit cards instead. Many major retailers offer store credit cards, including Target, Amazon, and Starbucks.
Many of these credit cards are closed loop, which means you can only shop with them at the retailer’s store. Others are open loop, which means they can be used almost anywhere, just like a regular credit card.
Store credit cards often come with:
- Flexible credit history requirements
- Account-opening bonuses (such as free gifts, discounts, reward points, etc.)
- Zero-percent APR introductory periods
If a retailer you shop with frequently offers a store credit card, it may be a great credit-building opportunity. Just make sure that your retailer reports your credit activity to the credit bureaus. Also, keep in mind that opening too many of these types of accounts can be harmful to your credit score in the long run.
#4 Become an Authorized User
One of the easiest ways to establish a credit history is to become an authorized user on someone else’s credit card account, such as a parent or a close relative. This person will need to agree to add you to their account.
As an authorized user, you’ll receive a credit card with your name on it that’s tied to the account. You can use this credit card as if it were your own. However, use it sparingly—you don’t want to rack up debt on someone else’s account!
The account holder is ultimately responsible for making the credit card payments. However, both of you will have these payments recorded in your credit histories. In turn, the account holder’s good credit can rub off on yours over time as their timely payments are recorded under your name.
Just make sure to choose someone who appropriately manages their credit. If you become an authorized user on someone’s account and they don’t make their payments on time, it can damage your credit history too.
#5 Apply for a Loan With a Co-Signer
If you have a close family member or friend with great credit, they can help you build a credit history by becoming your co-signer. A co-signer is someone who adds their name to your loan application. In doing so, their positive credit history can help you qualify for a loan that you wouldn’t be eligible for otherwise.
If you get approved for the loan, you and your co-signer will be held equally responsible for the payments. In other words, if you forget to make a loan payment, your lender will expect your co-signer to pay it instead. Both of your credit histories will be impacted by the credit activity on this account.
Since your co-signer is doing you a favor, it’s important to assure them that you’ll stay on top of your loan payments and protect their credit history every step of the way.
#6 Take Out a Credit-Builder Loan
If you can’t find a co-signer, you can also take out a credit-builder loan. Most credit-builder loans come in amounts of $300 to $1,000. The sole purpose of these types of loans is to build credit — not to finance a purchase. As a result, you won’t be able to spend the money you borrow with this loan. Instead, the funds will be placed in a locked savings account, controlled by your lender.
Once you’ve received your credit-builder loan, you can start making monthly payments on it. You must do so until the entire loan is paid off. After you’ve repaid the loan in full, you’ll gain access to the money from the locked savings account.
By making timely payments on your credit-builder loan, you can share positive credit activity with the credit bureaus and build up your credit history.
Credit-builder loans may sound similar to secured credit cards. However, their impact is more like contributing to a savings account that allows you to build credit history, rather than using a debit card.
#7 Report Your Rent and Utility Payments to the Credit Bureaus
Credit cards and loan payments aren’t the only types of payments that can help you build your credit history. Rent and utility payments can too. Just ask your utility providers to report your payments to the credit bureaus.
All of the following types of payments can be reported:
- On-demand streaming services
Many rent reporting services automatically share your payments with the credit bureaus. By taking advantage of them, you can gradually build your credit history over time without taking out a loan or credit card.
Building Credit Takes Time and Consistency
By employing some of these credit-building tactics and managing them responsibly, you can build a positive credit history over time. Just keep in mind that at least one of your credit-building accounts must be open for at least six months before the credit bureaus will be able to generate your credit score.
Once you’ve cultivated a high credit score, you’ll reap the rewards of having good credit, including better borrowing opportunities, lower interest rates, and cheaper insurance.
Just keep in mind that establishing a credit history is only the first step. You must keep up your good credit habits to maintain a great credit score long-term.
Explore Certified Credit’s Blog
For more credit-related tips and tricks, check out the Certified Credit blog. There, you can learn all about credit score improvement strategies, mortgage fraud prevention, loan customer retention tactics, and much more.
Consumer Financial Protection Bureau. Data Point: Credit Invisibles.
WalletHub. Student Credit Card vs. Regular Credit Card.