Your credit history is essential to your financial health. Without it, you might have trouble qualifying for any type of loan, get hit with higher interest rates and insurance premiums, and have to pay a bigger deposit when renting an apartment. Not to mention, the majority of rewards and travel credit cards are only available to those with good credit.
Building credit requires time and learning good financial habits. Continue reading to learn how to build credit, even if you have no credit history at all.
How to build credit without credit history
No credit history? No problem. Below are two ways to establish it:
Become an authorized user
A good way to establish credit without even applying for your own card is to have a friend or family member add you as an authorized user on their credit card.
You’ll get your own card when you are added to the primary cardholder’s account and you can use it to make any purchase you want (as long as the authorized user has given the OK). The payment history from the account will show up on your credit report and help you create both a credit history and a credit score.
Note that you should become an authorized user only if the primary cardholder has a solid payment history and typically keeps the balance on the card low.
Look into alternative credit data
While the three major credit bureaus most commonly get data from lenders, there are other ways to contribute to your credit history.
According to Experian, 65 percent of lenders use alternative data to make a lending decision. The majority of them verify income and employment, but more and more are starting to consider things like rent, phone and utility payment history.
There are various tools you can use to self-report these types of payments. For instance, Experian Boost allows you to add utility payments to your credit file. The service exclusively uses positive history, meaning that if you forget to pay your gas bill, it won’t cause your credit score to drop.
Some credit scoring models, including FICO Score 9 and VantageScore 3.0, also incorporate rental payments. Many landlords don’t report to the credit bureaus, but you can add the data to your credit file yourself by using third-party services like RentTrack, Rock the Score, Rent Reporters or Rental Kharma.
How to build credit with a credit card
A credit card is one of the most valuable tools for credit building. Credit cards offer the most common type of revolving credit — accounts that let you borrow whenever needed up to a certain limit. Opening a credit card doesn’t just add to your credit mix, it also provides an excellent opportunity to establish a positive payment history.
Choosing the right credit card
Before you apply for a credit card, do some research and find one that fits your needs and credit standing.
For instance, there are rewards credit cards that can give you cash back or points for spending in categories like groceries, dining or travel. However, you typically need good to excellent credit to qualify for them.
If you’re working on rebuilding your credit, you might want to look into secured credit cards, which require a deposit that typically becomes your credit line. Retail credit cards also have less stringent credit requirements and can be a good starting option.
Managing your credit card
Paying your credit card bills on time is crucial to building credit. Even one late payment can be problematic, as it will stay on your credit report for seven years. It’s critical to make at least the minimum payments, but the more you pay, the better for your credit utilization. Ideally, you want to pay your credit card bill in full every month. Besides helping your credit, it will also allow you to avoid paying interest.
Finally, it’s typically better to keep your credit cards open to continue extending the length of your credit history and avoid hurting your credit utilization. If you’re not happy with your current credit card, there are ways you can address the issues and keep it open.
For example, if you have a secured credit card you’re ready to graduate from, you can call your issuer and ask to upgrade it without closing the account. Or, if you have a card with an annual fee that doesn’t justify itself in your situation, you can request to downgrade.
Additional ways to build credit
Here are some other ways you can build your credit:
Apply for a loan
An installment loan is another type of credit that you can add to your credit portfolio. It allows you to borrow a set amount of money and repay it over a fixed period. The payment amounts are often fixed as well, though some allow you to pay off your balance early.
Some common examples of installment loans include auto, mortgage, student and personal loans. If your credit score isn’t in the best shape, you can still qualify for many of these, but your interest rates might be considerably higher.
Note that the FICO Score 10, launched in 2020, might factor in personal loans differently. However, it may take lenders a long time to adopt the new credit scoring model. FICO Score 8 is still considered the most widely used model.
Use a co-signer
You can sometimes get better rates if you use a co-signer — a family member or close friend who agrees to share responsibility for the loan. If they have a well-established credit history, it may positively impact your approval chances and interest rate.
However, it’s important to remember that co-signing is considered a significant financial risk. Any late payments will appear on the co-signer’s report too. If someone puts their trust in you to help you with your credit, make sure to pay on time — and thank them for their help.
Take out a credit-builder loan
A credit-builder loan can be a handy tool for building credit if you have poor credit or none at all. It allows you to borrow a relatively small amount of money — usually up to $1,000 — that the lender holds until you pay off the loan in full. After that, you get access to the money you borrowed.
Think of it as a certificate of deposit — a fixed-term savings account — only you’re paying interest and improving your credit history while doing so. The term length is typically between six and 24 months.
It doesn’t take long to establish a credit history if you don’t have any. For a FICO score to be calculated, you need to have an active account on your credit report for at least six months. With VantageScore, it can happen much faster. As long as you have at least one account on your credit report, it can start to factor in your VantageScore.
Good credit, however, doesn’t happen overnight. It may take you years of dedication and practicing good credit habits to get there, especially if you’re rebuilding it. Most negative entries can stay on your credit report for seven years, and bankruptcies last up to 10. That’s why it’s essential to keep your credit healthy.
The road to good credit is a long one. Still, with patience and a responsible approach, you can get yours where you want it and unlock all the benefits that come with it.