Without credit, lenders can’t gauge how reliable you are at paying bills. That’s why some people suggest that having no credit is as bad as having bad credit.
The good news is that building credit isn’t hard. Below is how to build credit while creating a positive credit history.
Why having no credit is bad
Although many people aspire to living a debt-free lifestyle, having no credit can pose more problems than having a bad credit score, particularly if you need to take out a loan or rely on a credit score to set up utilities or sign an apartment lease. Because lenders use applicants’ credit history to determine the likelihood that they can repay a debt or their monthly bill, having no history to analyze leaves lenders playing a guessing game. This is one reason why establishing credit is important.
How to build credit from scratch
Banks like to see that you can manage your money. To begin building credit, consider some of the following strategies:
- Piggyback on someone else’s credit: Becoming a joint account holder is a fast way to add information to your credit history. As a joint account holder, you’ll gain the other person’s history with the credit card in question, which can be a benefit and a challenge. When you’re considering someone to be a joint account holder, choose wisely and act responsibly. You don’t want to add another person’s negative credit history to your credit report.
- Make your rental history count: Ask your property management company if it reports your payments to Experian RentBureau. If it doesn’t, you can sign up for a rent payment service that works in partnership with RentBureau and have your rental payment history reported.
- Get a secured credit card: Secured credit cards require a deposit to obtain a line of credit. For example, a $500 credit limit typically requires a $500 deposit. Initially having to put that money out may seem like a hassle, but it’s an easy way to obtain credit in your own name. After a year of responsible use, most secured cards return your deposit..
- Gas cards: If you have a car, fuel expenses are already a part of your spending. These credit cards allow you to use fuel as a foundation for building credit. Pay the gas card on time (or pay it off on a regular basis) to establish credit, without spending above your normal expenses.
- Take a personal loan: After you’ve been using credit cards for a while and paying them on time, you should have enough credit history to qualify for a small personal loan. Although this isn’t a quick fix — personal loans usually take 6 to 12 months to raise your credit score — it does diversify the types of credit on your credit report, and it proves that you can consistently make payments on time.
Tips for building a positive credit history
While you’re establishing credit, you want to be careful to build a positive credit history. Having a good credit score opens the door to lower interest rates and better opportunities for loans and credit in the future. Here’s how:
- Pay bills on time: Your payment history makes up 35 percent of your credit score. Pay your bills on time to avoid lowering your newly established credit score.
- Monitor your credit report: As you build credit, you should keep a watchful eye on your credit report to monitor your own financial habits and spot any mistakes so you can correct them.
- Keep an eye on utilization: If you rack up charges and maintain high balances, your credit score will suffer. Most experts recommend keeping your balances at least 30 percent below the limit.