4 Ways to Safely Build Credit When You Have None

If you don’t have a credit history, you may have a low or no FICO credit score (the three-digit number used by financial institutions to determine an individual’s creditworthiness).

Unfortunately, a good credit score is necessary in many common situations – trying to get a car loan, getting a credit card, or applying for an apartment rental, to name a few.

Trying to build a good credit score from scratch is a lot like trying to get a job with no experience. It’s a catch-22 – to build credit you need to borrow money, and in most cases to borrow money you need a decent credit score.

So how can you start building credit from scratch? Try one of the four options below. They are not mutually exclusive, so trying a few at a time can help you establish a score faster.

Don’t forget to create and use credit does not need to spend more money than you have. Credit can be a double-edged sword, so do your best to avoid spending more than you can repay.

1. Become an authorized user of someone else’s credit card

To use credit (i.e. be the primary holder of a credit account such as a personal loan or credit card), a person must be at least 18 years old. However, even those under 18 can get a head start on their credit-building mission, assuming they have an adult friend or relative who trusts them enough to risk their own credit score.

Many credit cards allow (and encourage) account holders to add “authorized users” to their accounts. An authorized user is a trusted person who has been granted access to an account holder’s line of credit. This allows the authorized user to bypass the credit score requirements that are usually required for credit card approval so that they can qualify for timely payments from the account holder.

Only the primary account holder is responsible for credit card payments, but payments are usually reported to the three major credit bureaus (Experian, Equifax, and TransUnion) on behalf of both people. This allows the Authorized User to accumulate a credit history, which is the basis of a credit score.

Safety instructions

  • This type of relationship can be risky for both parties. An Authorized User does not need to carry a card or make purchases to receive a primary account holder’s one-time payments, but is legally permitted to do so, although the primary account holder assumes full responsibility.
  • A primary account holder may remove any authorized user from their credit account at any time by contacting the account administrator.
  • If the Primary Account Holder misses payments or fails to keep their credit card usage relatively low, the effect on the Authorized User’s credit score could be negative instead of positive.

2. Get a secure credit card through your bank

A “secured” credit card account is so called because it is secured (on the bank’s side) by a cash deposit made by the account holder and held by the bank as collateral.

In other words, you give your bank an amount of money — say $300 — and they give you a credit card with a limit of $300. You spend money with the card and then make payments on time, which the bank then reports to the bureaus, helping you build up credit over time.

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The bank doesn’t have to worry about your default because they already hold the maximum amount you are allowed to spend. If you don’t pay your balance, the bank will pay itself with the money you have deposited as collateral.

With a secured credit card, you’re essentially spending money you’ve borrowed from yourself in order to build a credit history.

Safety instructions

  • As long as you make your payments, the deposit you use as collateral must be returned to you after a set period of time or if/when you close the account. If possible, try to keep the account open, as the length of your credit history affects your score.
  • Secured credit cards often have higher interest rates than traditional cards, so it’s best to pay off your balance in full each month to avoid incurring interest.
  • Some secure cards come with maintenance fees.

3. Take out a loan from your bank

A credit generator loan works very similarly to a secured credit card. You take out a loan for, say, $500, but you don’t use it – your bank keeps that money in a collateral account.

You then use your income to pay off the balance gradually over, say, a year. These payments are reported to the bureaus, which helps you build your credit.

When the loan is repaid, your bank releases the $500 from the collateral account and returns it to you. Or, better yet, if you don’t need the money right away, you can use it as collateral for a secured credit card (see point 2 of this list).

Safety instructions

  • Credit builder loans charge interest, so by taking out one, you are essentially paying to build credit.
  • Any missed payments will be reported to the credit bureaus after 90-180 days and will negatively impact your credit score.

4. Use a service to report rent and bill payments to credit bureaus

Rent and bill payments are generally not reported to credit bureaus unless they are unpaid and subject to collections. In other words, paying on time doesn’t help you build your credit, but not paying can certainly hurt your credit.

These days, however, some services exist that allow tenants and payers to have their payments reported to the three offices – usually for a monthly fee – to help them build or improve their credit.

By creating an account with a data provider like LevelCredit or PayYourRent, you can pay to have your monthly rent payments shared with the credit bureaus. Another service, known as Experian Boost, lets you report other bill payments (like phone, utilities, and even streaming services like Hulu), but only to Experian, one of three major credit bureaus.

Safety instructions

  • Some of these services cost money, and whether the benefits are worth the price is up to you.
  • Since rent and utility payments aren’t as widely used as loan and credit card payments in credit reports, it’s unclear what impact reporting this information will have on your score. .

General tips for establishing and maintaining good credit

  • Pay your bills on time: By far the most important factor in maintaining good credit is paying your bills, especially credit card and loan payments, on time. Set up automatic payment where possible.
  • Leave accounts open: Your credit age, or how long you’ve successfully borrowed and repaid money, affects your score. Don’t close credit card accounts just because you no longer use them. Leaving them open (as long as they don’t charge an annual fee) benefits you.
  • Maintain multiple credit accounts: The use of your credit is one factor that affects your credit score. This is the ratio of the total amount you owe to your total credit limit. The lower this ratio, the better it is for your score. Even if you only use one credit card, having three open credit card accounts with no balance is a good way to minimize your usage.
  • Don’t ask for too many lines of credit at once: When you apply for a credit card or loan, it appears as a “serious inquiry” into your credit report. That’s not a bad thing, but too many requests in a short period of time can temporarily lower your score. Try to space applications a few months apart when possible.

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