How to Build Credit When You Have None
Whether you just graduated and have no credit, or have made it through your adult years without building credit, these tips will help you out.
Editor’s Note: This is a topic that’s near and dear to me. In my journey to adulthood I somehow skipped the lesson on why credit cards are important! At 26, I’m just starting to build my credit beyond student loans. I wish I’d read this article years ago, and I’m so glad it’s available for anyone who is in the same boat as me. Share this with the recent college grads in your life, I promise they need to know this!
If you don’t have any existing credit history, building credit should be one of your financial priorities. However, getting started can be tricky. You won’t be approved for certain types of loans (like a mortgage, for example) with no credit history, so you’ll need to start with specific types of accounts and take the appropriate action to move in the right direction.
What is a Credit Score?
Your credit score is a numerical value that’s intended to give lenders an indication of the level of risk they would face by lending to you. But it gets confusing if you don’t understand that there are a few different types of credit scores.
You may have heard the terms “FICO score” and “credit score” used interchangeably, but they’re not exactly the same thing. The FICO score was created by the Fair Isaac Corporation in 1989 (source).
“Credit score” is a more generic term and there are other types of credit scores, including the Vantage Score, which was created as part of a collaboration between the leading credit bureaus Experian, Equifax, and TransUnion.
Lenders may use your FICO score or your score from Experian, Equifax, or TransUnion to evaluate credit and loan applications. Some lenders will look at scores from multiple bureaus.
Credit scores can range from 300-850, with a higher number indicating a stronger credit and repayment history, and lower risk to the lender.
There may be differences in the credit reports and scores that you have with each of these bureaus due to some accounts not being reported to all of the bureaus.
Why Does My Credit Score Matter?
Your credit score can impact you in a number of ways, including:
- Loan applications (mortgage, credit card, car loan, personal loan, etc.)
- Interest rates that you’ll be charged for those loans
- Applications for other accounts (like bank accounts, insurance, phone service, etc.)
- Rental applications
- Job applications
A bad credit score or no credit score can prevent you from getting a loan or credit card, force you to pay higher interest rates, or even prevent you from being able to rent an apartment or land a job (source).
With major implications, it’s easy to see why a credit score matters.
What is a Good Credit Score?
According to Experian, credit scores fall into these buckets:
- Very poor: 300 -579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
Experian also reports that the average credit score in the U.S. is 703 (according to a 2019 report). The same study found that 59% of Americans have a score over 700, while 34% of Americans fall into the “very poor” or “fair” categories with scores of 669 or below.
How is My Credit Score Calculated?
The credit score can seem like a bit of a mystery if you don’t understand how it’s being calculated. The tradelines on your credit report will be used by an algorithm to determine your credit score.
Each loan or account that is being reported to the credit bureau is a tradeline. This could include things like a credit card account, a student loan, a car loan, a personal loan, a mortgage, or some other type of loan or debt.
The tradelines will include information like the current balance, available credit (for credit cards and lines of credit), the status of the account, and payment history. The section on payment history will indicate how many times the account has been 30, 60, and 90 days late. In general, late payments will not show up on the credit report unless they are at least 30 days late.
Each credit bureau has its own algorithm for calculating credit scores and they don’t share the specific details with the public. However, they all use very similar factors and the difference between the three leading credit bureaus and the way they calculate the score is of minimal importance.
In general, to improve your credit score or maintain a good credit score, these are the most significant factors:
- Payment history. Making payments on time is the best thing you can do for your credit score.
- Credit utilization. Maxing out your credit cards is a bad sign to lenders. Try to keep your balance well below your credit limit.
- Length of credit history. Older accounts can help to show stability and increase your score. Start building your credit now and you’ll benefit in the future.
- Credit mix. Try to have a few different types of accounts/loans.
- New credit. Opening too many accounts at once can hurt your score.
When we’re talking about payment history, it’s important to clarify that this refers to making the minimum required payment. Paying off your credit card in full each month is a good habit, but for the purposes of your credit report and credit score, simply making the minimum payment each month is all that’s required. Your credit report won’t show a late payment because you paid the minimum instead of the full balance.
What is the Difference Between Bad Credit and No Credit?
A credit score of 670 is the minimum needed to fall into the “good” category provided by Experian. Failing into the “very poor” or “fair” categories can hurt your chances of getting approved for loans, and some loans or credit accounts may require even higher credit scores (for example, certain credit cards require excellent credit).
However, there is a difference between having bad credit and having no credit history. Not everyone will have a credit score. In general, you’ll need at least one account that has been reported to the credit bureau for six months or more in order to have a score.
Having no credit score indicates a lack of credit history. Although it doesn’t indicate that you have a poor payment history, a lack of a credit score can make it equally challenging for you to get approved for a loan or line of credit.
It’s very common for young people to have no credit score. If you’ve never had a credit card or never had a loan in your name, it’s very possible that you have no score.
What Does it Mean to “Build Credit”?
If you’re in a situation where you have no credit score or you have very limited credit history, building credit can go a long way towards improving your credit score.
Building credit basically means that you’re adding tradelines and positive payment history to your credit report, which will demonstrate your creditworthiness and improve your credit score. Lenders and creditors will look more favorably upon you as a borrower if they can see a strong history in your credit report.
Everyone goes through the process of building credit, so if you have a limited credit history, don’t feel discouraged.
How Can I Start Building My Credit?
Now that we’ve covered a lot of background information related to credit scores and credit reports, you’re probably ready to take the steps toward building your credit history and establishing or increasing your credit score.
Building credit when you have none can be a little challenging. You’ll need to establish some payment history, but in order to do that, you’ll need lenders or creditors who are willing to lend to someone with no credit history. The key is to use the right types of accounts that are intended for people with no credit or very limited credit history.
Apply for a Student Credit Card
If you’re a student, chances are, you have very limited credit history or no credit history at all. There are certain credit cards especially for students and they’re intended for people in your situation. You don’t need a strong credit history in order to get approved, so this can be a great way to start to build some credit.
Most student credit cards have low credit limits, which limits the risk for the lender. It also allows students to build credit and start using a credit card without the risk of racking up a huge amount of debt.
The interest rates on student credit cards tend to be high, so it’s very important that you’re able to pay the balance in full each month. Use it to buy essentials, but only if you have the money and you can pay the balance to avoid interest charges. Making minimum payments on a student credit card may not hurt your credit score, but you’ll wind up paying way too much in interest.
Become an Authorized User on Someone Else’s Credit Card
Another excellent option is to become an authorized user on the credit card of your parents or another family member. As an authorized user, you will not be the primary borrower, but you’ll have a card and the payment history of the account can impact your credit report and your credit score. It allows you to piggyback on someone else’s good credit.
There are a few important things to point out:
- You need to be aware that becoming an authorized user will only help you if the account is in good standing and if it continues to be paid on time. Becoming an authorized user can actually hurt your credit score if the primary account holder does not make payments.
- Check with the credit card issuer to see if they report payment history to the credit bureaus based on your status as an authorized user. Most credit card issuers will do this, but it’s not always the case. If it’s not going to be reported to the bureaus, it won’t help to build your credit.
Get Your Rent and Utility Payments Reported to the Credit Bureaus
Generally, rent and utility payments will not be reported to the credit bureaus. If you’re trying to build credit, getting these payments reported to the bureaus can help and there are a couple of ways to do it.
Credit Karma offers a free option that makes it possible to get your rent payments reported to Equifax and TransUnion. They can also help you to get utility payments reported to Equifax.
Experian has their own free program called Experian Boost that can help you to get credit for your phone and utility bills. You’ll need to connect it to the bank account you use to pay the bills, verify the positive payment history, and see the results instantly.
Apply for a Secured Credit Card
Secured credit cards function like a typical credit card except for the fact that the borrower (you) will make a cash deposit that provides some security to the lender. The deposit is collateral that the issuer can take if payment is not made on the account.
While most credit cards are unsecured, secured cards are typically used by borrowers with very limited credit history or poor credit. If you’re unable to get approved for an unsecured credit card, you may be able to get approved for a secured card that will allow you to build credit.
Secured credit cards tend to have low credit limits and the cash deposit will equal the credit limit. As a result, you won’t be able to rack up debt and you won’t be able to use it for large purchases. The goal here would be simply to get a tradeline on your credit report and start to establish some positive payment history.
Get a Co-Signer
A co-signer will essentially guarantee the payment of a loan. If the primary borrower does not pay the debt, the co-signer will be responsible.
If you have limited credit history or a poor credit score, a lender may require you to get a co-signer for a loan. For example, you may need a parent to co-sign your first car loan.
The co-signer’s credit history and credit score can help you to get approved for a loan that you would not qualify for on your own. Of course, it’s still important that you’re able to pay your debts as your co-signers won’t want to be forced to pay or have their own credit damaged.
Once you have the loan, you can use it to build your credit. Make all of your payments on time and it will help you to establish your own credit so you won’t need a co-signer in the future.
Apply for a Credit Builder Loan
Credit builder loans are used specifically for the purpose of establishing or improving credit. The borrowed money will be put into a bank account and you’ll make payments until it is paid off. The lender will report the payment history to the credit bureaus, so you’ll be building a positive payment history, assuming you make all of the required payments on time.
Because these loans are intended to build or repair credit, you don’t need a strong payment history or a good credit score to get approved. They are intended for people with no score or a low score.
Community banks and credit unions will often have some sort of credit builder loan (they may have their own unique name for it), but you may need to check with them as these loans are not always advertised. Another option would be to use an online lender like Self.
Make Sure Any Loans are in Your Name
A loan, credit card, or line of credit will only impact your credit report and your credit score if it’s in your name. It’s not uncommon for parents to put car loans or other debt in their name because students or young adults have no existing credit history. However, that’s not helping the student or young adult to build credit.
If your goal is to build credit and payment history, be sure that any loans are taken out in your name. You can have a parent or someone else co-sign, but you should be the primary borrower in order to build credit.
Make All of Your Payments On Time
By far the most important thing you should do is make all of your payments on time. It doesn’t matter what types of accounts you open (secured credit cards, student credit cards, credit builder loans, etc.), nothing will help to build your credit if you’re not making the payments on time. In fact, it will have the opposite effect and will damage your credit.
Although you want to be opening some accounts to establish your payment history, you need to be careful that you’re only taking on what you can handle. Don’t take out a loan or buy anything on credit if you can’t afford it.
Ideally, you want to use credit or debt to shift the ways that you pay for things, but you don’t want to pay more. For example, instead of paying for your groceries with cash, use a credit card and then pay the balance in full each month. Or instead of making car payments on a loan that’s in your parents name, get a car loan in your own name with a parent as a co-signer.
Use Only a Small Percentage of Your Available Credit
While it is not a hard and fast rule, there is a general rule of thumb that you should only use 30% of your available credit. That means that if you have a credit card with a credit limit of $10,000, you shouldn’t carry a balance of more than $3,000.
Credit utilization is used in determining your credit score because consumers with more available credit are generally a lower risk to lenders. If you’re maxing out your credit cards, it will make other lenders question your ability to pay your debts.
The 30% rule is more of a general recommendation than anything. There are so many factors that are involved in determining your credit score and you won’t see an immediate drop in your score as soon as you hit the 30% threshold. It’s more of a sliding scale and the lower your credit utilization is, the better it will be for your score.
Keep this in mind when you’re opening new accounts and when you’re making purchases with your credit cards. After you’ve established a history of paying on time, you can also contact the issuer and request an increase of your credit limit.
Don’t Open Too Many Accounts
Throughout this article, we’ve looked at several different types of accounts that you can open in order to build your credit. However, you’ll want to go about this gradually. Don’t open too many new accounts close together.
How much is too much? That will depend on a lot of factors, including the amount of credit history that you have. If you have zero credit history and no current tradelines, start by opening one account and make prompt payments for a few months before opening any other accounts.
How to Get a Free Copy of Your Credit Report and Credit Score
Monitoring your credit is an important part of the process. It’s very possible that you don’t know what’s on your credit report or what credit score you have, if you have one. Thankfully, there are some easy and free ways to get a copy of your credit report and see your credit score.
Federal law requires Experian, Equifax, and TransUnion to provide you with a free copy of your credit report once every twelve months. AnnualCreditReport.com is authorized by the government to provide those reports to consumers. There are a lot of other websites that offer free credit reports, but not all of them are legit. For your safety and security, it’s recommended that you use AnnualCreditReport.com.
You can request a copy of your credit report from one, two, or all three bureaus at a time. If you request one at a time, you can spread them out throughout the year. (Note, due to COVID-19, you can access a free credit report weekly through April of 2021.)
Once you have a copy of your credit report, you’ll be able to see exactly what’s being reported to the credit bureau. If your report has no tradelines, that means that the bureau is showing no credit history for you. Be sure that you check the details of any tradelines on the report to be sure that they are accurate. If there are any errors, file a dispute with the bureau to get it corrected.
The only downside to the free credit reports is that they will not include your score. You’ll be able to see all of the details on the report that impact your score, but you won’t see the actual score.
There are a few ways that you can get your credit score for free. The first option is through your credit card issuer. Some (not all) credit card dashboards will allow you to request your score for free.
Another option is to sign up for a free account with Credit Karma, which provides you with access to your score, as well as basic credit monitoring services.
With the combination of these free resources, you can keep an eye on your credit score and your credit report with minimal effort.