5 Ways to Build Credit When You Don’t Have Any

By |2018-08-22T04:32:40+00:00March 23rd, 2018|

When you don’t have any credit history, it’s hard to qualify for credit cards and loans, which are ironically the very tools you need to build good credit. Lenders simply can’t judge your ability to manage debt without any past information to evaluate.

This is a common challenge for young people and anyone without any solid credit history. Luckily, there are several financial products and strategies you can use to get your credit off the ground.

Here are five ways to build credit when you don’t have any.

Secured Credit Cards

To open a secured credit card, you’ll need to put down a security deposit. The amount you put down will determine your credit limit – for instance, a $300 security deposit would typically get you a card with a $300 limit. After that, you can use your card to make purchases and the card activity will be reported to the three major credit bureaus.

Your security deposit lets credit card companies hedge their bets, as they will simply keep your deposit if you fail to pay. But after a period of timely payments, the company may raise your credit limit for free or even refund your security deposit.

Authorized User Status

Another way to build credit is to have someone add you as an authorized user on their credit card. Once you’re added, the primary cardholder’s card activity can be used to build your own credit over time. You don’t even need to use the card or have physical access to it at all.

You should only become an authorized user if you and the primary cardholder completely trust one another. If one of you goes on a spending spree or if the primary cardholder misses payments, your credit could be damaged. You should also verify that the primary cardholder’s card issuer reports card activity for authorized users – if they don’t, your credit won’t budge.

Credit Builder Loans

As you might guess from the name, credit builder loans are offered by some banks and credit unions specifically to help borrowers build credit. Typically, you borrow a small loan that is deposited in a CD or savings account. You make monthly fixed payments until the loan is paid off, and then you get access to the funds.

By keeping the balance until it is paid off, banks reduce their risk as you use the loan to build credit.

Passbook or CD Loans

Passbook or CD loans are similar to credit builder loans, but you use the funds you already have in a CD or savings account to secure a loan of the same amount from your bank. You build credit as you make fixed monthly payments, and you can access your balance again when the loan is paid in full.

Pay Your Bills on Time

Once you open a credit card or loan or put a monthly bill in your name, you must pay your bills on time every month. Payment history is the single biggest contributing factor to your credit score. Over time, building a solid payment history will cause your credit to grow, giving you access to the financial products you need.

Conversely, late or missed payments can do severe damage to your credit – so make sure you always pay on time and don’t borrow more than you can afford.