You probably remember the problem that came up when you were looking for your first job; it’s hard to get a decent job without experience and you can’t have any experience unless you get a job.  It’s one of those annoying “chicken or the egg” type of problems. The same issue surfaces when you are trying to build your credit history. It’s hard to get credit without a credit history, and you can’t build a credit history without getting credit.  

Fortunately, there are some tricks that can help you build credit even if you have no credit history.  If you are young and just starting to build your credit, these tips will be especially useful.

Your credit history and your credit score are extremely important factors in your financial life.  Having a poor credit score can cost you loads of money throughout your life, so it’s incredibly important to build and maintain your credit.  This article will give you eight ways to build your credit history from scratch.

If you are interested in building or improving your credit score, make sure you also read my articles, “What Makes up Your Credit Score?” and “How to Improve Your Credit Score”.  These articles will give you a good background on the factors that affect your credit score.

EIGHT WAYS TO BUILD CREDIT

1) APPLY FOR A SECURED CREDIT CARD

To get started building your credit history, one good first step is to apply for a secured credit card.  This type of credit card is usually easy to get, requires little or no credit history, and allows you to establish a pattern of making regular payments on time.  Your ability to make on-time payments is the most important factor that determines your credit score, so establishing a pattern of on-time payments goes a long way to help build a positive credit history.

When you get approved for a secured credit card, you will be required to have some type of savings account with the bank that issued the credit card.  A deposit amount equal to your credit limit is usually required in the savings account. The deposit acts as collateral in case you miss a credit card payment.  This deposit arrangement makes the credit card essentially risk-free for the bank, and that’s why this type of credit card can be offered to someone with no credit history.

Even though the credit limit is secured by your deposit, you still have to make your payments on time, just like you would with a regular credit card.  Making your monthly payments will start the process of building your credit history. Be sure to contact the bank to confirm that your payment history will be reported to the three credit bureaus (Equifax, Transunion, Experian).  You will only be building your credit history and credit score if your payments are reported to the credit bureaus.

2) OPEN A CREDIT BUILDER LOAN

A credit builder loan, also called a secured loan, is very similar to a secured credit card.  Here’s how it works. You apply for a loan at a bank, but instead giving the funds to you, the bank keeps the amount of the loan in a deposit account while you make your loan payments.  Once the loan is paid off, the bank releases the full amount of the loan to you.

As you repay the loan, your history of on-time payments will be reported to the credit bureaus so that you can start to build your credit history.  

These types of loans are specifically designed to help build credit, so they are easy to get, even if you have no credit history.  But keep in mind that, like with any loan, you will be charged interest. And the interest you are charged on the loan will be more than the interest the bank pays you on the deposit account holding the funds from the loan.  So it is not free, but is still an effective way to build your credit history.

3) BECOME AN AUTHORIZED USER

Another technique for building your credit is to be named as an authorized user on someone else’s credit card.  This allows you to use a credit card on their account, and because you are now associated with the account, it helps to build your credit history.

Being an authorized user is a responsibility, because although you are authorized to use a credit card, the primary account holder is on the hook for making all of the payments.  So you should have a arrangement with the primary account holder regarding how and when you will pay them back for any purchases you make with the credit card.

If you are going to be named as an authorized user on an account, make sure the primary account holder has a strong history of paying their credit card bills on time.  If they miss payments, it will hurt your credit score instead of helping it. You will only benefit from this strategy if the primary account holder is paying their credit card bills on time.

4) USE A CO-SIGNER

If you are unable to get a loan or a credit card due to your lack of credit history, one method to overcome this is to use a co-signer.  A co-signer is someone who will sign the loan or credit card agreement with you. The purpose of the co-signer is to guarantee payment on the account if you fail to make your payments.  It is much easier to get approved for a loan or credit card when you have a co-signer with good credit.

Before signing up for a loan or a credit card with a co-signer, make sure both you and the co-signer understand what you are signing up for.  Both you and your co-signer are on the hook for any money that is owed. This is different than being an authorized user on a credit card, where only the primary account holder is responsible for making the payments.  WIth a co-signed loan or credit card, both you and the co-signer are legally responsible for making the payments.

5) STUDENT LOANS

If you are a student and have taken out student loans, paying back those loans can be a great way to start establishing your credit history.  The payments you make on your student loans are reported to the credit bureaus, and will start to build a positive payment history.

Just make sure you are making you loan payments on time to avoid any negative remarks on your new credit history.  To avoid missing any payments, put your student loans on auto-pay. This makes paying back your student loans as easy way to improve your credit.  As an added bonus, your lender will usually lower your interest rate a bit if you put your student loans on auto-pay.

6) RETAIL CREDIT CARDS

If you love shopping at a particular store, opening a retail store credit card can be a great way to save money on your purchases and also help you build your credit.  Retail store credit cards are known for being easy to get, even if you have very little credit history.

If you are going to open a retail credit card, beware of potentially high interest rates.  Make sure you pay your full balance every month to avoid paying interest. As long as you use the card responsibly and pay your bills, you will build a good credit history and your credit score will start to improve.

7) AUTO LOANS

Obviously, it doesn’t make sense to finance a car just to build your credit history, but if you are already in the market for a car, consider financing a portion of the cost.  Auto loans are some of the easiest loans to get, so having a limited credit history is often not a problem. As long as you make your installment loan payments on time, you will start to build a positive credit history.

Remember that you will be charged interest on whatever amount you decide to finance.  So consider paying for some of the car in cash and financing the rest. This will give your credit history a boost and minimize the interest you will pay.   Since interest rates can vary widely, you need to find the best interest rate you can get, and then evaluate if the credit you will build justifies the amount you will pay in interest.

8) RENT AND UTILITIES

If you are a renter, you may not know that your rent and utility payments can be reported to the credit bureaus to build your credit history.  Not all landlords and utility companies will do this, but contact them and ask them to report your payments to the credit bureaus. If they are willing to report your payments, it can be an easy way to start building a positive payment history.  Benefits of this technique are that it is free (there is no interest to pay), and if you are already renting, you don’t need to find someone to be a co-signer for you.

NOW THAT YOU’VE BUILT CREDIT: MAINTAIN IT

So now that you have put all of the effort into giving your credit history a good start, you need to continue to work on it and maintain it.  Here’s what you need to do in order to keep building and improving your credit once you get your initial start.

  • Always, always pay your bills on time…always.
  • Don’t open too many new credit accounts over a short period of time.  This shortens the average age of your credit accounts, lowering your credit score.
  • Keep your balances low.  Don’t use more than 30% of your available credit.
  • Don’t close old credit card accounts.  Keeping any old accounts open increases the length of your credit history, and that’s good for your credit score.
  • Check your credit report every year to identify potential errors.

It is important to stay on top of your credit report and know if your credit score is headed in the right direction.  You can get your credit report every year at annualcreditreport.com to check it for errors. You can keep an eye on your credit score by checking out a free credit monitoring website like Credit Karma or Credit Sesame.  Also, many credit card companies now give you access to your credit score as a cardmember benefit.

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