How Do You Build Credit When You Have No Credit History?
One of the smartest things you can do for your finances is to build credit when you are young.
Not everyone gets this great advice while their young, and that’s really a big shame, but regardless of your age right now, today is the right time to begin building credit.
When you have no credit history, it’s really really hard to get any type of loan. It can even be tricky to get your first credit card sometimes.
At the end of the day, you may need money to buy a car or pay for much needed home renovations. With zero credit history, lenders find it tough to give you money because you don’t have proof of paying money back responsibly.
So it’s really really important that you get started building your credit today. And that’s what I want to share with you here. These are my best tips on building credit fast when you don’t have any credit at all.
Building credit when you have no credit
When you don’t have any credit history, you’re usually not going to get loans are good interest rates or a loan at all. You almost certainly won’t qualify for a big loan, unless perhaps it’s a student loan.
So what you need to do is start with a small loan and then begin establishing credit with your small loan. Once you have shown you can be responsible with this small loan, you can get more small loans or get bigger loans.
Both will help you establish credit quickly and jumpstart your credit score in the UP direction.
Credit cards are your best friend
The first type of loan I recommend getting is a credit card. A credit card is a revolving type of credit. It means you have access to a certain amount of money at any time, say $500, and you can choose to borrow a few dollars of it or all 500 of it.
Credit cards are (in my opinion) the BEST type of credit for people building credit for the first time. This is because a basic credit card with a small limit of $500 should be obtainable for almost everyone, and building credit with it is extremely easy.
Other types of loans, like a car loan is typically harder to get when you don’t have credit history. I don’t recommend starting here when your purpose is to establish credit history. Unless you get a co-signer for these types of loans, it will be difficult to get them. But they are also excellent at building credit history.
Below, I want to outline 5 steps to get credit if you have no credit.
5 steps to building credit history with no credit
1. Apply for a credit card
The first thing you’ll need to do is apply for a credit card. You want to get a credit card that has easy approval for just about anybody. These credit cards typically don’t come with any perks (like earning points) and don’t have any coolness factor about them, but they are “starter” credit cards designed for people with no credit.
2. Apply for a secured credit card if you can’t get a regular credit card
You may find you have a hard time getting a regular credit card with a small limit of $500. Sometimes if you have really bad credit, lenders won’t give you credit cards, though when it comes to people with no credit, you likely shouldn’t run into this problem, as there are cards designed for first time credit users.
Anyhow, a secured credit card is a credit card that you have handed money over as collateral for. For example, if you wanted a $500 secured credit card, you will give your bank $500 as collateral. So if you maxed out your credit card and ran away, the bank has your $500 and they will use it to pay the $500 you ran up on your credit card. Usually, after a certain amount of time, the bank will give you back your collateral, because you’ve shown you can be responsible with a credit card.
3. Use your new credit card every month!
When you get your first credit card, it’s really really important to begin using it right away. You want to use it monthly.
You can purchase stuff on it almost every day if you like. Or you can use it just once a month. It actually doesn’t matter how much you use your credit card. It only matters that you USE IT, and use it at least once a month.
Your credit report doesn’t look at the amount of transactions you have on your credit card. It only shows that you USED your credit card for the reporting month.
You want to use your credit card each and every month! It’s really important because for every month you use your credit card and pay it back, it improves your credit score, and that’s what builds your credit history! Which leads me to the next step….
4. Pay the entire amount of your credit card balance each month – every month!
Without exception, you HAVE TO pay back your credit card balance every month. EVERY MONTH. I bolded that for a reason!! It’s the most important thing to build credit history.
Lenders look at your ability to pay back your loans. This is the single most important factor in determining your credit score, and increasing your credit score. In fact, it accounts for 35% of your overall credit score.
So whether your credit card balance is at $35 or $350, you need to pay all of it back each month. If you cannot pay all of it back each month, then DO NOT buy that much stuff on your credit card. It’s really as simple as that.
Your credit card is your way of showing lenders you can be responsible with credit. So BE RESPONSIBLE with it. Putting more money on your credit card than you can afford to pay back is doing the opposite, and not surprisingly, it hurts your credit score.
If you are unable to pay back the entire amount for whatever reason, then at the very least make the minimum payment – which is usually very low (maybe $10). It’s important to make the minimum payment at the very least because it shows a payment for the month.
The WORST thing you can do is run up a credit card balance and ignore it for several months. This will drag your credit score down fast. If all you have is 1 credit card, it’s really going to ding your credit score quickly.
5. Get more than 1 credit card, either in the beginning or later
Don’t limit yourself to one credit card. Most people I know have several. The purpose of having several credit cards is like having several loans. Your credit score will improve faster when you show you can be responsible with more credit, so it makes sense to have several credit cards.
You can choose to get 2 or 3 credit cards at the start of your credit history building process. I would apply for them all at the same day instead of spreading them out.
I don’t know exactly how the credit processing works, but every time you apply for new credit, it brings your credit score down a few points or so. But it takes time for this to show up. If you apply for a few credit cards in the same day, I think this would be beneficial because the credit bureau may not report the change in credit score yet.
Either way, if you are able to get a few credit cards to start with, I personally recommend doing that. I certainly would have done that myself if I were to go back in time.
Imagine a year later you have 3 credit cards that all show 1 full year of responsible usage, rather than just 1 credit card. It will look way better to lenders when you apply for a loan and it should almost certainly give you a higher credit score too.
Treat each credit card like you would if you had just one credit card. Use each credit card every month. Doesn’t matter if it’s $5 or $500 on each card. Then pay off the entire balance before the due date of each credit card. Set up online banking for this part. It’s really easy to pay credit cards with online banking. You can even set up automatic withdrawals from your checking/savings accounts so you wont “forget” to pay back a card.
If you choose not to get a few credit cards at the start that’s fine too. At about the 6-8 month mark, and after you’re a little more comfortable using a credit card, you should apply for another card. The benefit of this is that by this time, you have shown a little bit of responsible credit usage, and you could qualify for better credit cards.
Other ways to build credit history
Any time you get a loan and begin paying it back, you are building your credit score up and creating a credit history profile.
After you have at least half a year of credit card usage history, you can also look at getting other types of loans, because you may qualify for them.
It’s not impossible to get lets say a car loan when you have no credit. Lenders are willing to lend people money even if they are a bit riskier. But they do so at much higher interest rates typically. So it’s not really smart to get a car loan that requires you to pay a bloated interest rate. It’s smarter to establish some credit first, which will get your credit score as high as possible, and then apply for that car loan. This should get you more favorable rates.
Some people take out loans just to build credit history. For example, they will go to the bank and take out $5000 for the purpose of paying it back quickly. They don’t actually need the money, they just want to build their credit history. It’s something you can consider doing if you want to build your credit as fast as possible.
Eventually, you’ll get a mortgage or a line of credit, and all of these plus your credit cards and car loans adds up to a very strong credit mix and credit history portfolio. You’ll have a rock solid credit score of 800+, probably closer to 850 which is the max FICO score. You’ll get the cheapest rates possible any time you apply for a loan for the rest of your life – so long as you continue to be responsible with credit.
It’s a great place to be.
Start working on your credit today. Just get a few credit cards that’s all you need to do to get started. Good luck!