We’ve all heard how important credit history is. Establishing and maintaining a good credit record can have a significant impact on your purchasing power. Your credit report and credit score come into play when you’re looking to take out a credit card, buy a car, or purchase a home. It can even be a deciding factor in whether you get approved for an apartment or offered a job. It’s commonly known that a poor credit history can hinder all of these things, but what many people don’t know is that having no credit can be just as detrimental.
So what is a newbie to do? If you haven’t yet established credit, there are several ways you can kick-start your credit journey. Here are some ideas to get you headed in the right direction:
Become an authorized user of a credit card.
One way to start building credit is to get approval to be an authorized user on someone else’s credit card account. If you’re added as an authorized user, you can get a card with your own name on it and you’ll be able to make purchases with it, but you will not be the primary owner of the card. When someone adds you as an authorized user on their account, they remain the primary cardholder and are legally responsible for the entire account balance and payments, but the account will still show up on your credit report.
What this means is that if the primary cardholder makes all of the payments on time, those on-time payments will be reflected in your credit report as well, helping you to establish a positive credit history. It’s important to note however that not all credit card companies report authorized user activity to the three national credit bureaus – Experian, Equifax and TransUnion – so you’ll want to check beforehand to ensure you’ll be working with one that does.
But keep in mind that it could go the other way too. If the primary cardholder fails to make payments and is otherwise irresponsible with the card, that behavior will not only hurt their own credit report, but it will negatively impact yours as well. For this reason, it is extremely important to only enter into an authorized user scenario with someone you trust completely. It’s also a good idea to keep tabs on your own credit report to ensure the relationship isn’t hurting your credit score. If it is, you’ll want to remove yourself as an authorized user
on the card.
Get a co-signer.
If you’re looking to take out a credit card or a loan, you may have a hard time doing so if you have no credit history to speak of. One way to secure the financing you need, and build your credit at the same time, is to find someone with a strong credit history to act as a co-signer on the account. When two people co-sign on a loan, one acts as the primary account holder, while the other acts as the co-signer. When someone co-signs with you, they could act as either the primary or the co-signer. In both cases, they are equally responsible for the debt. Basically, they’re telling the lender that if you don’t pay, they will.
Because a co-signer takes on shared responsibility for the debt, the account will appear in their credit report as well as yours. Successful repayment of the borrowed money will help both of your credit histories, while any late payments will hurt both of your credit scores.
Apply for a secured credit card.
A secured credit card is designed for consumers with little or no credit. It’s backed by a cash deposit you make upfront, and usually the amount you deposit is equal to your credit limit. Once you open the account, the secured credit card works just like a regular credit card. The only difference is that if you don’t make your payments, the bank will take the money out of your deposit.
So what’s the point of a secured credit card if you’re giving the bank the same amount of money you’re allowed to spend? Well, the point is to build credit. Think of a secured credit card as a chance to prove your creditworthiness. If you make all of your payments on time, that information will be reported to the credit bureaus and you’ll be establishing a credit history. Once you’ve used a secured card to build your credit, you can qualify for an unsecured card – one that doesn’t require a cash deposit and has better benefits.
Apply for a credit-builder loan.
Similar to a secured credit card is a credit-builder loan. With this type of loan, the amount you “borrow” is deposited into a savings account in your name, however you cannot access the money until you have paid the loan in full. Your payment history is reported to the credit bureaus, helping you to establish a positive credit history if you make all of your payments on time. Once you’ve repaid the loan, you can access the funds. Credit builder loans can be a bit hard to find, but they are often offered at smaller financial institutions like community banks and credit unions.
Consider a student credit card.
If you’re a college student looking to build your credit, you may want to consider a student credit card. Many credit card companies target college students specifically because of their future earning potential. In most cases, college students can be approved for a student credit card without a credit history, they just have to demonstrate enough income or assets to cover the minimum monthly payments. These types of credit cards can be a good way to establish credit, however it’s important to note that they usually have lower credit limits and higher interest rates than traditional credit cards.
Take out a store credit card.
Many stores offer private credit cards that can only be used at that particular retailer. Store credit cards typically have less-stringent underwriting standards, meaning they’re generally easier to obtain than a traditional credit card. For this reason, they can be a good way for someone with no credit, or poor credit, to begin working toward a strong credit score. Like student credit cards however, these types of cards usually come with relatively low credit limits and high interest rates, so it’s very important to use them responsibly.
Make your student loan payments on time.
If you’re a student or recent grad, there’s a good chance you have student loans. Even though many people cringe at the thought of paying back student loans, for someone with little to no credit history, student loan payments can be a great way to build credit. Because student loan payments are reported to the credit bureaus, making your payments on time can pave the way for a strong credit score. Like other loans however, missing payments will hurt your credit history. To avoid missing monthly payments, you’ll need to ensure that they are affordable. If your student loan payments are currently too steep for you to keep up with, you may want to look into refinancing them.
As you can see, there are many different roads you can take to get from the world of no credit to the world of good credit. No matter which approach you decide to use, just remember the importance of making all of your payments on time, every time!