Having a solid credit score and an established credit history is a necessary part of anyone’s life. These pieces of the financial puzzle allow you to gain access to affordable financing for a variety of needs, like purchasing a home, buying a car, or covering unexpected expenses with a credit card. But if you’re just getting started down your adult financial path, it can seem impossible to create a credit history out of thin air.
Fortunately, there are several steps you can take that can help establish credit when it is otherwise nonexistent. Here are five tips for building a credit history from scratch.
Tips for Building Good Credit
Get a Secured Credit Card
Although it may seem counterintuitive, having a credit card is one of the most efficient ways to build credit. However, it’s challenging to get a credit card when you don’t have a credit history established. Secured credit cards are designed to fix this conundrum.
A secured credit card requires a deposit, typically a few to several hundred dollars, that acts as collateral for a credit line. You have access to a credit card limit up to that deposit amount, and you can use the card anywhere credit cards are accepted. Over time, on-time payments to your card, along with responsible use of your available credit limit, are reported to the credit bureaus to establish a track record for you.
There are also bad credit card options that may not require a deposit. These cards cater to individuals who need to repair their credit, but they can just as easily be used for those with no credit at all. These card options come with high interest rates and low credit lines, so be sure to review the terms and conditions before applying.
Try a Credit Builder Loan
Similarly, a credit-builder loan or secured loan can help you establish a credit history over time. A credit-builder loan works differently than a secured credit card in that it does not provide a credit line you can use over and over again. Instead, you receive a lump sum that is repaid, plus interest, over the course of several months or a few years. A deposit is often still required to get this type of loan, but as payments are made, your lender reports your activity to the credit bureaus to help establish your payment history.
These lenders offer unique ways to get and use a credit builder loan, promoting both credit establishment and savings at the same time. Several banks, credit unions, and online lenders also offer secured loans. The good news is that interest rates on these loans can be quite low, but the loan amounts you may be eligible for are also on the low end.
Be an Authorized User
Another option for building credit is through authorized user accounts. When some in your life already has established credit, like a parent, spouse, or close family member, you may have an opportunity to be added as an authorized user to one of their credit accounts. Authorized users do not have to submit a formal application to be added to a credit card, and they have just as much access to an available credit line as the primary account holder. So long as payments are made on time and the credit line is used responsibly, being an authorized user can be beneficial.
It’s important to note that being an authorized user comes with responsibilities. You need to have an open and honest discussion about your use of the card, any limits imposed on spending by the primary account holder, and other restrictions that may be necessary. You are equally on the hook for repayment of balances you rack up, so be careful with your spending as an authorized user.
Use Credit Building Tools
In today’s digital world, there are a handful of credit-building tools at your disposal that don’t necessarily involve taking on new debt. For instance, Experian, one of the three major credit bureaus, offers a new tool that allows you to get credit for your on-time utility and mobile phone payments. The application known as Experian Boost links to your bank accounts to check for these types of bills and then reports your history of payment to help calculate your credit score. The same can be done for rent payments through several different tools.
Establish Sound Financial Habits
The best thing you can do to establish credit when you don’t have any is to create a history of on-time payments to credit accounts. That could mean student loans, a car loan, or any of the credit card or loan options mentioned above. Your credit score calculation relies heavily on payment history, so get in the habit of paying your bills on time as soon as possible.
It is also helpful to ensure you’re not using too much of your available credit. Keeping credit use to 30% or less of your credit lines puts you in a great position to have a strong credit score. Finally, having a mix of different accounts, like loans and credit cards, shows you can be responsible with various credit types.
These tips and tricks help you establish credit from scratch, laying the groundwork for access to affordable financing in the future.
