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Being new to credit or having no credit history may not feel like a big deal if you primarily use cash or a debit card. That is until you need to borrow money. When it comes time to finance a car or take out a mortgage for a new house having a thin credit file can stand between you and your purchase. You’ll likely find it hard to get approved for the loan or face higher interest rates that will cost you thousands. Your lack of a credit score can also hurt you when you want to rent an apartment, open utility accounts, apply for a job, or get the best rates on insurance.
Think you don’t have a good enough credit score to get a card? Think again!
Fortunately, it is possible to build credit from scratch. You don’t even have to take out a credit card! Get started to today to put yourself in a better position tomorrow. Here are six actionable steps you can take to beef up your credit profile.
1. Become an authorized user
One of the quickest and easiest ways to build credit is to become an authorized user on someone else’s account. This means that you can use their credit card to build your credit history and you don’t even have to apply. Be sure to choose someone with a good to excellent credit score, low credit utilization ratio, and who always pays their bills on time. Their good credit behavior will help to boost your score. You also want to make sure that the card will report the authorized user to the three major credit bureaus, otherwise you won’t get any credit.
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2. Apply for a secured credit card
Secured credit cards are a great way to build credit. They are typically easier to qualify for than unsecured or traditional credit cards so you have a better chance at getting one. Secured credit cards require you to make a security deposit upfront, which then serves as your line of credit. The amount you deposit usually starts at $200 but can be as low as $49. Just like a regular credit card, you make purchases and pay them off. Over time, with responsible use, you can establish your credit history. Some providers may even upgrade you to an unsecured card after a period of timely payments. Just make sure they do report your payments to the credit bureaus.
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3. Take out a credit builder loan
As the name suggests, credit builder loans are made to help you build credit by establishing a positive payment history. Unlike a regular loan, the money you borrow is held by the lender in a savings account or a CD until the loan is repaid. You repay the loan in monthly installments, and those payments are reported to the credit bureaus. Once the loan is paid off, the money, and sometimes any interest earned, is released to you. It’s a great way to build credit and be forced to save money at the same time.
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4. Make small purchases
You need to use credit to build credit. This doesn’t mean that you have to make huge purchases and go into debt. Start small. Make purchases that fit your budget and pay them off promptly. This steady, responsible activity can positively affect your credit score. Be sure to pay your balances off in full each month and keep your credit utilization below 30% of your credit limit. Ideally, don’t use more than 10% of your credit limit each month.
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5. Report your on time rent payments
You can build credit without taking out a credit card or a loan. Traditionally, regular rent payments aren’t reported to credit bureaus so you’re not getting credit for your responsible behavior. However, you can change this. Ask your landlord or management company to report on-time rent payments. If they won’t or are unable to oblige, there are several services including Experian RentBureau that now allow you to include these payments in your credit report. Once you sign up, the company will verify your payment histories and report them to the credit bureaus potentially improving your score.
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6. Get Experian Boost
The credit bureau Experian has its own answer to the issue of reporting bill payments. It came up with Experian Boost, a free and easy to use tool that lets you receive credit for on time utility, cell phone, and steaming service payments. Link your bank account and Experian will verify the bill payments and add them to your report, potentially boosting your score. The issue here is it only impacts your Experian credit report, so if a lender pulls a credit report from a different bureau it won’t help you.
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Final Thoughts
Building credit doesn’t happen overnight. VantageScore will calculate a credit score with one month of data but FICO – the more commonly used scoring model – needs 6 months of credit activity to generate a score. If you’re starting with no credit history, getting a good credit score will take longer than a few months. This isn’t a process you can rush, so it’s best to get started before you need to borrow money. Remember, keep your account balances low, consistently pay your bills on time and in full, and you’ll be well on your way to attaining good credit. Your future financial self will thank you.
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