How to Build Your Credit from Scratch
If you are looking for your first credit card, you may find out that you don’t qualify for even small limit cards such as gas station credit cards or grocery store cards. So, if you don’t have any credit, and can’t get approved for a standard credit card, where should you start? Without an existing credit score, there are a few methods you can choose to help start building a good credit score.
Apply for a secured card
Probably the easiest way for you to start building up a credit history, although you will need a few hundred dollars saved up to use this method, is to apply for a secured card. Unlike standard, unsecured credit cards, secured cards require you to make a deposit which varies depending on the creditor. This deposit will be the limit that’s available on your card, and the creditor will keep your deposit as collateral. Otherwise, the secured card will act just like a regular credit card; you can use it for small things like gas or grocery bills and then pay back the full balance at the end of the month to build your credit.
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Most lenders will review your credit activity after anywhere between seven months to a year after you open the account, and if you’ve been responsible with your card, they will automatically upgrade you to an unsecured card as well as refund your original deposit for the secured card. However, if you’ve built up a decent credit score and your lender hasn’t upgraded you, you can close your account with them, preferably after you’ve been approved for another card, at which point they will refund you your deposit.
Become an Authorized User
Chances are you know a friend or a family member who already has a credit card. If they are willing to add you as an authorized user on their card, that may be able to bolster your credit score enough to qualify you for some credit cards. Once you’re an authorized user, you’ll be able to use that card just as you would if it were yours, except you won’t be legally obligated to pay the bill every month (that responsibility still falls on the primary cardholder).
Before you do this, you’ll want to call the card provider and make sure that they report authorized users to the three major credit bureaus, as some do not. If they don’t, then being an authorized user won’t do anything for your credit score. Also, if you get the opportunity to become an authorized user, please pay your share of the bills to the primary cardholder, or come to an agreement that makes you both happy. They’re putting their credit on the line for you. Don’t abuse this privilege.
Ask Someone to Co-Sign for you
Loan and credit card applications have a field for a co-signer’s information. If you can convince a friend or family member to co-sign for you, this will greatly increase your chances of getting approved, provided that the co-signer has a good credit score. But be aware that if you’re for any reason unable to pay your credit card bill, the co-signer will be fully responsible for the amount owed. Be sure to discuss this with the potential co-signer before applying for anything.
Get a Credit-Builder Loan
A pretty obscure loan that not many people have heard of that could help you build credit is the credit-builder loan. These loans are typically for minimal amounts, usually no greater than $1,500, explicitly for those who have either bad credit or no credit. Credit-builder loans are mostly offered credit unions, as well as some banks, and differ in their terms and conditions.
There are the typical secured and unsecured credit-builder loans, which function the same as their standard loan counterparts. However, some lenders offer a credit-builder loan that secures the loan amount in a savings account that you can’t access until you make the final monthly payment on the loan amount. While the idea of paying for the money you can’t have doesn’t sound too appealing at first, it’s a decent option, as the monthly payments are usually small amounts. This type of loan functions as a forced savings program that also builds your credit.
If you’re interested in a credit-builder loan, you should call any local credit unions in your area and ask if they provide them.
Use a Rent Reporting Service
An even lesser known tactic than the credit-builder loan, is the use of a rent reporting service to help start a credit history. There are several rent reporting services available online, either for free or for a yearly fee, that report your rent payment history to the three major credit bureaus. However, not all credit scores will use this information in their calculations, so depending on which card you are applying for, this may or may not help out. The good news is, some of these rent reporting services will tell you which cards you should be able to apply for if you use their service.
Now you’re on Your Way to Having A Good Credit Score
After having followed at least one of these tips, you should be well on your way to establishing your credit. Now you just have to remember to pay your bills on time, keep your balance on your cards low (below 30%), and keep yourself from opening too many accounts at once. Another good practice is to always check your credit score. If you get a monthly bill from your card issuer, your credit score should be printed on the statement. If not, there are several sites online that let you check your score for free.