How to Build Credit When You Have No Credit History
Building your credit can be a little tricky, especially if you do not have a credit history. This means that you can’t get a loan, apply for a credit card, or even rent an apartment.
Credit measures your trustworthiness. The earlier you start building your credit, the better.
Credit looks at your entire financial history.
It affects almost all aspects of your financial life and controls how much money you can borrow, the rate of interest a lender will charge you, the type of job you can do, and even the apartment you can rent.
You may think that interest rates don’t matter, but they actually do. With good credit, you can get lower interest rates on your loans, such as credit cards, mortgage, car loans, etc. This can mean a significant amount of savings, especially when it comes to those who want to take out a mortgage loan.
What is a Credit Score and Why Should You Care
To measure credit, credit bureaus use a score known as “credit score.”
These are numbers used by credit bureaus to rate your credit history. The 3 biggest credit reporting agencies are TransUnion, Equifax, and Experian.
It is extremely important that you understand how credit scores work so you can get started with getting your credit score higher for the reasons I mentioned above. A high credit score simply means stronger borrowing power.
Credit scores are measured between 300-850. If your score is between 300-600 then you are on the lower end and are likely to pay more in terms of interest rate, and if your credit score is between 600-850, that means you are doing well.
If you don’t take good care of your credit, then your credit won’t take good care of you.
– Tyler Gregory
How Long Would it Take You to Build Your Credit?
It really depends on how you will approach this matter. Building credit doesn’t usually take a long time. According to Experian, building good credit may only take between 3-6 months of regular credit activity but building good credit or a high credit score may take longer. You have to be patient and focus on the long-term. Pay your bills on time, never miss a payment, and watch your credit score slowly but surely go up.
Here Are Some Ways on How You Can Build Your Credit:
Start with your student loan (s)
If you owe a student loan after graduation, you may want to make sure that you start making payments as soon as you’re able to. Student loans are just like installment loans that you pay for a specific period of time. And making timely payments can definitely help you improve your credit. Just like any other types of loans, late payments on student loans can adversely affect your credit as well.
One thing you may want to consider is to consolidate your student loans. By doing this, your loan payments will generally be lower and spread out for a specified period of time and is based on your capacity to pay. I highly recommend that you set-up an automatic payment for this purpose to make sure that you don’t miss any payments.
Get a retail or store card
This is a great way to start building your credit. Most retail stores offer their own card and you may want to take a look at opening an account with one of them. You need to be mindful of the interest rates that come with these types of credit cards as they are mostly higher than regular bank credit cards.
Retail credit cards also have less-strict requirements, although they typically have low credit limits and the approval process is easier which makes them the perfect first step towards building your credit. Just make sure you do not go on a shopping spree and mess it all up.
A smart way to do this is to watch out for those stores that offer no-interest credit cards. Such offers usually happen during the Holiday season. I started building my credit using one of those popular electronic stores by taking advantage of their 6-month with a no-interest offer on a laptop purchase.
Get a secured credit card
When building your credit from scratch, you will need to start things off with something simple, like a secured credit card. This is a card that will require you to make a security deposit which will be used as collateral. This deposit will usually have the same value as your credit limit.
Credit card companies are more likely to approve secured credit cards for first-time borrowers because the deposit eliminates the element of risk in case of default.
To build credit, be sure to make the payments on, or before the due date. Or better yet, automate the payment if this process is available. Defaulting at this stage is detrimental to your progress.
Get a builder credit loan or a secured loan
A builder loan is used to help people build credit. This is good for those who do not have any credit history, poor credit or have very little credit.
The process is fairly simple. The bank will lend you money, and hold it in one of their accounts until you repay the money in full. It is sort of a forced savings plan since the money you pay will be refunded in the end.
These payments are then reported to the credit bureaus, and will clearly show that you have been paying your loan on time.
You can find these types of loans in a credit union or a community bank.
The interest rates may be high but these loans go a long way in helping you create a credit history.
Use a co-signer
This is just as it sounds. It is possible for you to qualify for a certain type of loan like a car loan if you can find someone with good credit standing, to co-sign for you.
A co-signer guarantees the lender that they will ensure the loan is repaid, and in case of any issues, they are responsible.
Finding someone who trusts you enough to co-sign with you on a loan may not be easy. Your best bet is family members, friends or even colleagues. Sometimes all you need to do is ask.
Become an authorized user
This involves finding someone willing to add you as an authorized user of their card. It simply means giving you the authority to use someone else’s credit card. With this type of set-up, you as an authorized user can make purchases but you aren’t responsible for the debt incurred on the credit card.
Choose a primary cardholder who has a long history of good credit if you want to go with this route to build your credit.
Be credit responsible
Keep in mind that credit building revolves around how responsible you are, and you should try and demonstrate this. None of the ways I discussed above will work if you do not do the following:
- Pay your cards on time and never miss a payment
- Do not buy things you cannot afford to pay
- Pay more than the minimum
- Never go over your credit limit
- Monitor your credit card expenses
It is not enough to just practice some of the points outlined above, you must constantly keep evaluating yourself and check whether you are doing a good job or not.
You should track your credit report because it holds the most important information about your credit. This is the best measure of your progress and whether or not you are doing things right. Your credit score is a summary of the information on your credit report.
If you want to build your credit, you need to realize that it’s not going to happen overnight. It takes some work and a lot of patience but it’s all worth it. The flexibility and the benefits that come with it are enormous. Establishing good credit is an important part of the American way of life. It is essential in getting your dream house or that dream car and quite possibly that dream job.