For someone new to the world of building credit, it can be a confusing start since you may be unsure of where to find legitimate information. This blog will cover how to build your credit if you have little to no credit history.
You need a good credit score for all the significant milestones in life, like studying in the best college, buying a new house or a car, or even leasing something.
Moreover, most credit card companies mandate applicants to show credit history, which is then used to accept or reject them. There are ways to build credit even when you are just getting started.
Here are three things you can do to build credit despite having no credit history.
1. Apply for secured credit cards.
This is one of the best ways to build your credit when you don’t have a credit history. It is much easier to qualify for secured credit cards despite having a low credit score or no credit score at all.
These secured credit cards can be used like any other traditional credit card. They can help with establishing good credit as long as you responsibly handle all your payments and dues.
Secured credit cards are quite similar to unsecured credit cards, but unsecured credit cards come with a credit limit, can incur interest charges, and may even earn you rewards.
What differentiates secured credit cards from unsecured credit cards is the deposit to receive a line of credit. The deposit amount usually starts from $200, but in some cases, it can be as low as $49. Therefore, if you make a security deposit of $500, you’ll get a credit limit of $500.
Nevertheless, it is good to remember that making timely payments on your secured credit card each month can help you start well with your credit score and create a dynamic credit history.
2. Become an authorized user.
Probably one of the easiest ways to build credit is to become an authorized user on a credit card owned by a family member or a friend.
Although, when you choose to become an authorized user, make sure that the primary account holder has a good (670 – 799), if not excellent (800 – 850), credit score.
You would not want to become an authorized user on an account that owes a lot of money to creditors, has late payment history, or any negative items in their credit history. It can negatively impact your credit right from the start.
Additionally, make sure to show responsible credit behavior. Create a plan to make your payments on time so that you don’t wrack up debt on someone else’s credit card.
3. Consider getting a credit builder loan.
There are different alternatives for you if you want to avoid getting credit cards to build your credit. A credit builder loan can help you establish or rebuild your credit in case of bankruptcy or when you’re building credit for the first time in your life.
Small credit builder loans are great for fresh college graduates, newly divorced individuals, and new immigrants who have just arrived in the country.
How this works:
- Your bank or credit union approves your credit builder loan application.
- Funds from the loan get directly dispersed into a savings account to which you don’t have access.
- The bank withdraws monthly payments on your loan and informs credit bureaus about your timely payments.
You are pretty much guaranteed to make timely payments on this type of loan, which helps you build 35% of your FICO score.
Anyone with no credit history will start seeing a huge increase in their credit scores after a couple of months.
Anyone with low credit scores will start seeing progress, however, it will be slow. First, your positive payment history needs to overcome the existing negative items in your credit report to make faster progress in the future.
Once you follow the above-mentioned points to the tee, you’ll have a living credit file within six months. With a positive start, you can fine-tune your credit habits and follow them so that your credit score surges in the future.
Here’s what you must do to build an excellent credit score over time.
Keep your payment history perfect.
- Make your monthly payments on time towards your secured credit card account.
- Spend your self-funded line of credit, pay it off in time, and repeat.
- Use your secured credit card to pay utility bills and other small payments so that you never overspend.
Keep your credit utilization ratio under 30%.
To explain this with a simple example, if someone has spent $2000 out of their $4000 credit line, they’ve utilized half of their credit, which means their credit utilization ratio would be 50%.
Having said that, once you exceed the 30% threshold, FICO and VantageScore start lowering your credit score.
Keep a few of your paid-off accounts open.
By keeping a few unused accounts open, you can help your credit utilization rate. If you’ve paid off a Visa and want to close the account, consider keeping it open but not using it.
Starting from scratch when building your credit history is an opportunity for you to move in the right direction and get a little closer to your credit goals with each step.
When you consistently make payments on time, all the components start working together, helping you grow your credit even stronger.
Month after month, year after year, you’ll finally get there. You’ll be able to enjoy the perks of your consistency a short time down the line.
Remember to keep monitoring your credit report from time to time so that you can avert any problems before they turn into disasters.
In case you are already struggling with low credit due to negative items in your credit report, Cool Credit can help.