Don't have much of a credit history yet? Here's how you can change that.
Building a credit history is a must for every adult, and the sooner you do it, the better.
Your credit history obviously determines whether you get approved for credit cards and loans, but it can also affect other areas of your life. To give one common example, landlords may check your credit before deciding whether to approve your rental application.
The tricky part is getting started. It's hard to open a credit card when you have no credit score. But it's also nearly impossible to build credit without a credit account. To help with that, here are several ways you can start building your credit from scratch this year.
1. Petal credit cards
For consumers who are building credit for the first time, I love the two credit cards offered by Petal.
This card issuer is unique because it can use your banking statements to approve your credit card application. Simply link your bank accounts when you apply. Petal will then use your bill payment history from your banking transactions to decide whether to approve you for a card.
Petal currently has two cards:
- Petal® 1 "No Annual Fee" Visa® Credit Card: Offers 2% to 10% back with select merchants
- Petal® 2 "Cash Back, No Fees" Visa® Credit Card: Offers up to 1.5% cash back on purchases (1% to start, 1.25% after you've made six on-time payments, and 1.5% after you've made 12 on-time payments)
You don't need to pay a security deposit for either card. And as you can see from the names, neither card charges an annual fee. Be aware that Petal cards are not designed for people with bad credit -- such as a history of late payments -- but if your credit history is thin, they may be perfect.
2. Student credit cards
If you're enrolled in college, a student credit card is a great way to start working on your credit.
The best student credit cards don't charge security deposits or annual fees, so you can build credit free of charge. Many of them earn rewards, with cash back being the most common. And they may also include student-specific features, such as statement credits for good grades.
One thing you may wonder when applying for a student credit card is what to put for your income, especially if you aren't working. You're allowed to include scholarships, grants, and any allowance you receive from your parents. These alternative forms of income could help you get approved for a student card.
3. Secured credit cards
Secured credit cards are cards that you open by paying a security deposit. In many, but not all cases, your security deposit is equal to your starting credit limit.
This reduces the credit card company's risk. It won't take a loss if you don't pay your bill, as it can use your deposit to cover what you owe. That lower risk makes secured cards easier to get for consumers with bad credit or those who haven't yet established credit.
If you decide to get a secured credit card, look for one without any extra fees. Ideally, you won't need to pay any annual or monthly fees as you build your credit.
Another important feature with secured cards is the opportunity to upgrade to an unsecured card, also known as graduation. You want to be able to get your deposit back eventually, without needing to cancel the card.
4. Become an authorized user
If you know someone who is good with credit and doesn't mind adding you to their credit card account, it could help your credit score.
This technique is often referred to as credit card piggybacking. When you're added as an authorized user on a credit card, the card issuer will usually start reporting that card's activity on your credit file. Positive activity, such as on-time payments and a low balance, will be good for your credit.
It's best to only do this with a person you trust, such as a parent or spouse. After all, any negative activity could also be bad for your credit.
5. Sign up for a credit boosting service
There are two relatively new services that can help you raise your credit score: Experian Boost and UltraFICOTM.
Both services allow you to pump up your credit history by linking your bank accounts. Experian Boost counts streaming, cell phone, and utility payments in your banking transactions toward your payment history. UltraFICOTM is a different type of scoring model that uses the balances and activity in your bank accounts to potentially enhance your score. Lenders may offer you the chance to opt in when you apply for credit.
That limitation means you shouldn't rely entirely on Experian Boost and UltraFICOTM. But they can help to build at least one of your credit scores.
Building credit in 2021
It's not a big deal if your credit file's blank right now. There are more ways to build credit fast than ever before. If you make that your goal for 2021, you could be closing in on a good credit score by the end of the year.
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