We live in an age where having an established credit history matters. Maintaining a respectable credit rating is vitally important in many areas of your life.
Your credit is routinely checked, for example, when you secure a loan, rent an apartment, and it can even help to lower your insurance rates. It’s also not uncommon for employers to run a credit check as part of a background check when considering you for employment.
What do you do then if you are just starting out in life and you don’t have any credit history? What then?
* record scratch *
If you are just getting started in life and you have never had a loan, credit card, or anything else that requires payments, you most likely don’t have a credit history or credit score. If someone tried to run a credit check on you, it simply would not return anything.
All is not lost. There are some things you can do to establish and build a credit history. By being proactive, you can very quickly build a solid credit rating and be well-positioned for your first credit check.
Here are several things you can do to establish and build your credit:
1. Don’t Sign Up for a Bunch of Credit Cards
Before we explore the ways you can establish credit, it’s important to discuss one thing you don’t want to do if you currently don’t have a credit history. It’s almost as ludicrous as cutting up your credit cards. What is it? You definitely don’t want to sign up for a bunch of credit cards.
If you try to acquire credit cards without any credit history, you may be denied. This could actually hurt your credit rating since hard credit checks will be run for each card you apply for.
2. Obtain a Secured Credit Card
One of the easiest ways to establish credit is to obtain and use a secured credit card. This is a credit card you obtain from either a bank or credit union that is backed by money you deposit in an account. You are allowed to charge up to the amount held in the account.
If you obtain a secured credit card from a bank, for example, and deposit $1,000 against it, you then have $1,000 in “credit” you can use.
A secured credit card protects you from spending more than you can afford, and when you eventually decide to close the account, you get your deposit back.
After acquiring a secured credit card, the best strategy is to use it only for your normal living expenses (tanks of gas, meals out, groceries, etc.), and be sure to pay down the balance in full each and every month.
When inquiring about a secured credit card from a particular bank or credit union, find out whether they report your payments to the credit bureaus. Some do and some don’t. Since the idea is to establish and build your credit, you definitely want to obtain a secured credit card from a place that does report your payments.
3. Apply for a Student Credit Card
Another option for establishing credit is to apply for a student credit card (if you are a student). Student credit cards are easier to qualify for than regular credit cards with income requirements that are usually not very high.
The main downside to student credit cards is they typically do not have very high credit limits. Still, you can use one of these cards to establish credit by using it for small purchases and paying off the balance each month.
4. Take Out a Small Loan From a Bank or Credit Union
Another way to establish credit is to take out a small loan from a bank or credit union and then repay it over time. This is what I did years ago when I was just starting out in life, and it worked very well.
When you talk to a loan officer, be honest about what you are doing. When asked about what you need the money for, just tell the truth, that you are doing this solely to establish credit. Don’t make up some wild story about your grandmother being sick and needing the money to pay for medical expenses (or some other wild tale).
You can also offer to open a savings account at the bank you are seeking the loan from and depositing the money in that account so they will know it’s safe. Tell them you will only withdraw from the account to make the monthly payments on the loan. This will help to positively influence the loan officer’s decision.
5. Consider Using a Co-Signer
Another way to acquire a loan (if necessary) is to ask someone to be a co-signer. A co-signer with a good credit rating makes securing a loan much easier.
Most people are understandably wary of co-signing a loan if they don’t know you very well. Because of this, it’s best to only ask someone who knows you well and trusts you to make the payments, like a close relative.
6. Apply for an Unsecured Credit Card
It doesn’t take long to establish a credit history. At least a year of timely payments should do the job. Be sure to check your credit score with the credit bureaus after a year of using a secured credit card or repaying a small loan to see where you are. If everything looks good, consider applying for a regular unsecured credit card.
7. Be Sure to Pay All of Your Bills on Time
It should go without saying that in order to establish and build credit, you need to make all of your payments on time each month, preferably before the due dates. It’s these timely payments that build a good credit rating. Missed payments, on the other hand, can work against you and actually harm your credit score.
Simple Ways to Add Tradelines to Your Credit Report
A trade line is a record of activity for any type of credit extended to a borrower and reported to a credit reporting agency. For example, a mortgage loan is a tradeline, a credit card is a tradeline and trade lines are used by credit reporting agencies to calculate a borrower’s credit score.
Most creditors look at tradelines to determine if you are creditworthy, therefore, adding positive tradelines to your credit report comes in handy to improve your credit score. Some people are even buying authorized user tradelines to get their credit score back up, however, it is not the only way.
Pro-Tip: You can also add an authorized user tradeline on a primary tradeline. If you have a primary credit card, you can get someone authorized to post a tradeline on your credit report or vice versa — someone can put you on as an authorized user if you have a good credit score.
Creating a New Credit Account
Opening a new credit account automatically creates a new tradeline which allows you to have a positive record on your credit report. Also, increasing the number of total available credit lines can boost your credit score only if you are responsible for the payments.
Factors that determine your credit score include the type of credit you have in your account like mortgages, credit cards, etc. and the difference of how much money you had in that account and how much money you used. Where creating a new credit account can help you gain a positive credit score, it can quickly destroy it too if you are not careful with the usage.
I always advise people not to go for this option if they already have good credit from different sources. Your focus should be to go for quality rather than quantity. If you stay below the limits of your existing credits cards, the chances are that you won’t need to open new credit accounts.
Adding an Authorized User Tradeline
By far, the most efficient method of boosting your credit score is by adding authorized user tradelines to your credit report. The difference between a primary tradeline and authorized user tradelines is that a primary tradeline is handled personally by you and an authorized user tradeline is an account opened and managed by someone else.
This process is called piggybacking, which involves adding someone with good credit history on your account, and in turn, it gives a positive influx of credit and payment history.
Add a Pre Existing Account to Your Credit Report
This is one of the handiest and least risky ways to add tradelines to your account. Quite simply, you can ask a parent, a relative, or a close friend to add you to their account. This will allow you to benefit from the other person’s positive payment history. However, you can do damage to their credit history if you are not careful and they can in-turn damage yours too.
You can also confirm that all your current and existing accounts are listed on your credit report so that whenever you successfully pay off a loan, creditors know about it. All your previous loans, mortgages and credit cards need to be listed on your credit report to avail the benefits of a positive score.
How to Establish Credit
Having a solid credit history isn’t just about having a high credit limit on an unsecured credit card. It’s much more than that. It means being able to pass a background check for a job, qualifying to rent an apartment, and keeping your insurance rates as low as possible.
It means having power – credit power.
You can also start by checking your credit score. By checking your credit score and working to fix any discrepancies or building it higher you can pay less in interest, which will increase your net worth.
If you don’t know your credit score, you can use free services like Credit Karma that gives you your score for free. You can find out your score in under a minute!