Even if you plan to live debt-free, having no credit history can be a problem.
Depending on state laws, a credit report may be used for everything from setting insurance rates to vetting job applicants.
Of course, if you want to get a personal loan, finance a car, or buy a house, a good credit history will also be essential to getting the best rates.
But how do you go about establishing credit? Fortunately, it’s not as hard as you might think. Keep reading for everything you need to know to build credit the smart way.
What Does It Mean to Establish Credit?
Building credit means you are creating a record that shows you pay off your financial obligations.
When you take on a debt — whether that’s a credit card or a loan — the lender typically reports it to a credit reporting agency. There are three main agencies in the United States:
- Experian
- Equifax
- TransUnion
Then, each month, the lender tells these companies whether you paid your bill on time. If you fail to pay, that gets reported too. All this information is compiled in what becomes your credit report.
Other companies, most notably FICO and VantageScore, use information from credit reports to create credit scores. These scores serve as a simple way for lenders to determine whether they want to extend credit to an applicant.
The problem is that those who don’t carry any debt might have no credit history or what is known as thin credit history.
In these cases, a person might end up with a low credit score even if they have been responsible with their money. That’s because there isn’t enough data available to create a high score.
Build Your Credit History
Whether you are just out of school or simply haven’t used credit before, you can use the following steps to start building a credit history.
Check Your Credit Report
Before you do anything else, you need to check your credit report.
Even if you don’t have a history of credit, it is possible incorrect information has been assigned to your credit report.
Mistakes can happen by accident or an identity thief may have opened accounts in your name,
By law, everyone is entitled to receive one free credit report each year from each of the three major credit reporting companies.
However, during the COVID-19 pandemic, the agencies have agreed to provide free credit reports weekly to consumers.
There are plenty of places on the web that will try to charge you for credit reports or offer you free access in exchange for signing up for a service. Still, don’t be fooled. You can get your free report with no strings attached at the official website: AnnualCreditReport.com.
Get a Secured Credit Card
Once you have established that there are no errors on your credit report, one of the simplest ways to establish credit is to apply for a secured credit card.
Virtually everyone can get a secured credit card since these cards require a deposit equal to your credit limit.
For instance, if you make a deposit of $200, you can charge up to $200 worth of purchases. If your deposit is $500, your credit limit will be $500.
While a secured credit card doesn’t provide a lot of purchasing power, it will report your payments to credit bureaus, and a record of timely payments is the first step toward building your credit score.
Become an Authorized User on Another Account
Another option to build credit is to become an authorized user on someone else’s credit card account.
Once you are named an authorized user, the account will show up on your credit report, allowing you to benefit from someone else’s good record of payments.
Ideally, you want to be added as an authorized user on an account that has been open for a long time, has a low balance, and has a record of on-time payments. Only good friends and family members are likely to agree to add you as an authorized user.
If they are concerned about your spending on their account, you can always tell them you don’t need or expect a card.
You’ll still benefit from their payments even if you’re not making any purchases yourself.
Get a Store Card With a Low Limit
It’s not uncommon for department stores, supermarkets, and other retailers to have their own credit cards.
These cards often have lower credit requirements and may be more likely to approve someone with a limited credit history.
What’s more, you may be able to score discounts or other bonuses when paying with a store card.
Using a store card can be a good way to build credit if you make small purchases and pay them off each month.
However, don’t spend more than you can afford. Carrying a balance on a store credit card can be expensive since these cards typically have high interest rates.
Start Paying on Student Loans Even If You Don’t Have to
Even if you’ve never had a credit card, you may have taken out student loans for college or trade school.
As with other forms of debt, making payments on student loans can help build credit.
While there has been a moratorium on student loan payments for most of the COVID-19 pandemic, you may want to restart your payments now if you are trying to establish a credit history.
Likewise, you aren’t required to make payments while in school, but sending some money each month could benefit your credit report and score.
Get a Student Credit Card
If you are still in school, you may also be eligible for a student credit card.
These cards are designed specifically with college students in mind.
They may have lower credit requirements, and some are even available to those with no credit history. However, if you are younger than 21, you may need a co-signor on your account.
Student credit cards are more versatile than store credit cards and often come with additional perks. For instance, you may earn cash back on purchases or receive complimentary cell phone insurance coverage.
As with store cards, you want to be careful about carrying a balance since interest charges can quickly add up.
Dos and Don'ts of Building Credit
Building Credit FAQs
How can I build credit if I have no credit?
If you are starting from scratch, your best options will be to open a secured credit card or find a family member or friend who will add you as an authorized user to their account. Both of these strategies should work even for those with zero credit history.
How long does it take to establish credit?
You should plan for at least six months to create a record of timely payments that can be used to establish credit and create a credit score. If you miss payments or default on an account, it will take longer to build good credit.
What’s my credit score if I don’t have credit?
While most credit scoring models start at 300, this isn’t the starting number for most people. If you don’t have a credit history, you likely don’t have a credit score either. Instead, a score won’t be created for you until your credit report contains enough information for scoring companies to plug into their formulas.
