Published in: Credit Cards | Jan. 21, 2020
No Credit? Here's How to Build a Healthy History
By: Dana George
How do you qualify for credit when you have no credit score? Here are the steps you should take.
If you've never taken out a loan or opened a credit card, it's possible that you are "credit invisible" -- someone with too little credit history to generate a credit score. Lenders are less likely to risk giving a loan to someone with no credit score. It can also affect your ability to rent an apartment and, in some cases, to get a job.
It's a tricky spot to be in because you need credit in order to build a credit history, but without a credit history it's tough to get credit.
Understand what you're building
When a consumer attempts to borrow money, lenders check their credit reports with one of the three credit bureaus: Experian, Equifax, and TransUnion. They pay special attention to how well the consumer has handled debt in the past. Your three-digit credit score is an important part of this evaluation.
Credit scores range from 300 to 850, and higher scores are more attractive to lenders. There are several factors that go into calculating your score, but the most important one is payment history, which makes up 35% of your score. When consumers pay for something on credit -- including a mortgage, auto loan, personal loan, or credit card -- their payments are reported to the credit bureaus, which builds their payment history.
If you do not have a credit score or a payment history, lenders aren't sure what to think. This means your odds of securing a loan or being approved for a credit card are slim. The first step to getting credit is to get regular payments in your name that are reported to the bureaus.
Here are six steps you can take to build a healthy credit history -- and credit score:
1. Become an authorized user
Becoming an authorized user on someone else's credit card is one of the easiest ways to build credit. Let's say your parents have excellent credit and add you as an authorized user to one of their credit cards.
Even if you never charge a thing on the card, you benefit because their monthly payments are reported to the credit bureaus under your name along with your parents. Without doing anything -- and without needing to qualify for a card in your own right -- you can begin to build a positive credit history.
2. Apply for a student credit card
This one takes discipline but is worth doing if you are committed to treating a credit card like a dangerous weapon. If you're in college, it is likely that you have run across offers from credit card companies.
Take advantage of one of those offers to get a card. But don't use it to run up a huge balance that you'll have to pay even bigger amounts of interest on. Instead, use it to build your credit history.
Once you have it in hand, buy something. Ideally, you will purchase something you planned to pay cash for anyway -- like a meal or book. As soon as you've made a purchase, go to the credit card website and pay your balance off in full.
Don't spend more than you can afford to pay back, and never miss a monthly payment. Each month that you use and pay off the credit card, your credit report gets a little healthier.
3. Get a secured credit card
A credit card is secured when you provide a deposit of the money that you will be spending. It works like this: Let's say you have $200 cash. You pay that cash to the credit card company and in turn, they give you a credit card. However, your credit limit will usually equal the $200 you have put up as collateral.
Before you take out a secured credit card, make sure the company reports your payments to all three credit bureaus. Use the card responsibly by paying off your balance each month and be careful not to spend more than the amount you put up.
4. Speak with your landlord
Credit is not the only way you can build that all-important payment history. If you're renting, you can now ask your landlord to report your monthly payments to the credit bureaus. For many years rental payments were not reported to the credit agencies but today, Experian, Equifax, and TransUnion can include rental payment data in their credit scoring models.
5. Create a budget and fuss over it
Once you've overcome the first hurdle of getting credit in your name, it's time to use it wisely. There's no point in building a payment history if it is a bad one.
Use an online app to create a budget and check it like it's a newborn chick under a heating lamp. Your budget will not only include any money you have coming in, but will also remind you of debts you have due each month. It is vital that you pay all your obligations on time in order to build a positive credit score.
6. Be patient
According to Experian, you'll need to have open and active accounts for three to six months before a credit score is calculated. Those months can be well spent by learning all you can about building credit and giving yourself a strong financial foundation.
Like your college GPA or a bad case of ringworm, your credit score is going to stick with you for the long haul. Put in the work to make sure yours shows you in a good light.
Don't pay credit card interest until nearly 2022
The Ascent just released a free credit card guide that could help you pay off credit card debt once and for all. Inside, you'll uncover a simple debt-cutting strategy that could save you $1,863 in interest charges paying off $10,000 of debt. Best yet, you can get started in just three minutes!