Your credit history is essential to your financial health. Without it, you may have problems getting any type of loan, you will receive higher interest rates and insurance premiums, and you may have to pay a larger deposit when renting an apartment. Not to mention, most awards and travel credit cards are only available to those with a good credit history.
Building credit takes time and learning good financial habits. Keep reading to find out how to get a loan even if you have no credit history at all.
How to build credit without a credit history
No credit history? No problem. Below are two ways to install it:
Become an authorized user
A good way to get credit without even applying for your own card is to ask a friend or family member to add you as an authorized user on their credit card.
You will receive your own card when you are added to the primary cardholder account and you can use it to make any purchase (provided that the authorized user has given consent). Your account payment history will show up on your credit report and help you build both a credit history and a credit score.
Please note that you should only become an authorized user if the primary cardholder has a solid payment history and usually maintains a low card balance.
Explore Alternative Credit Data
While the three major credit bureaus most commonly receive data from lenders, there are other ways to contribute to your credit history.
According to Experian, 65% of lenders use alternate data to make a lending decision. Most of them check income and employment, but more and more are starting to take into account things like rent, phone, and utility bill history.
There are various tools you can use to self-report these types of payments. For example, Experian Boost allows you to add utility bills to your credit file. The service uses exclusively positive history, which means that if you forget to pay your gas bill, this will not lead to a drop in your credit score.
Some credit scoring models, including FICO Score 9 and VantageScore 3.0, also include rental payments. Many landlords do not report to credit bureaus, but you can add data to your credit file yourself using third-party services such as RentTrack, Rock the Score, Rent Reporters, or Rental Kharma.
How to build credit with a credit card
A credit card is one of the most valuable tools for creating credit. Credit cards offer the most common type of revolving credit, accounts that allow you to borrow when you need it, up to a certain limit. Opening a credit card not only increases your creditworthiness, but also provides an excellent opportunity to build a positive payment history.
Choosing the Right Credit Card
Before you apply for a credit card, do a little research and find one that suits your needs and creditworthiness.
For example, there are rewards credit cards that can give you money back or points for spending in categories like groceries, restaurants, or travel. However, you generally need good or excellent credit to qualify.
If you are working on rebuilding your credit history, you may want to consider secured credit cards, which require a deposit, which usually becomes your line of credit. Retail credit cards also have less stringent credit requirements and can be a good place to start.
Managing your credit card
Paying your credit card bills on time is critical to building credit. Even one late payment can be problematic, as it will remain on your credit report for seven years. It is very important to make at least the minimum payments, but the more you pay, the better for your use of credit. Ideally, you want to pay your credit card bill in full each month. In addition to helping your loan, it will also allow you to avoid paying interest.
Finally, it’s usually best to keep your credit cards open to extend your credit history and not hurt your credit usage. If you’re not happy with your current credit card, there are ways to resolve the issues and keep it open.
For example, if you have a secured credit card that you’re willing to refuse, you can call your issuer and ask for a renewal without closing your account. Or, if you have a card with an annual fee that doesn’t pay for your situation, you can request a downgrade.
Additional ways to get a loan
Here are a few other ways you can increase your credit:
Apply for a loan
An installment loan is another type of loan that you can add to your loan portfolio. This allows you to borrow a certain amount of money and repay it over a fixed period. Payment amounts are also often fixed, although some allow you to pay off the balance ahead of schedule.
Some common examples of installment loans include auto, mortgage, student, and personal loans. If your credit score is not in the best shape, you can still qualify for many of them, but your interest rates may be significantly higher.
Please note that FICO Score 10, launched in 2020, may account for consumer loans differently. However, it may take a long time for lenders to accept the new credit scoring model. FICO Score 8 is still considered the most widely used model.
Sometimes you can get better rates if you use a guarantor – a family member or close friend who agrees to share the responsibility for the loan. If they have a well-established credit history, this can positively impact your chances of approval and interest rate.
However, it is important to remember that co-signing is considered a significant financial risk. Any late payments will also be reflected in the guarantor’s report. If someone trusts you to help you with your loan, be sure to pay on time – and thank them for their help.
Get a loan builder loan
A credit builder loan can be a handy tool for building credit if you have bad credit or no credit at all. This allows you to borrow a relatively small amount of money—usually up to $1,000—which the lender holds until you repay the loan in full. After that, you get access to borrowed funds.
Think of it like a CD – a fixed-term savings account – only you pay the interest and improve your credit history in the process. The validity period is usually six to 24 months.
A credit history won’t take long if you don’t have one. You need to have an active account on your credit report for at least six months to calculate your FICO score. With VantageScore, this can happen much faster. As long as you have at least one account on your credit report, it may start counting towards your VantageScore.
Good credit, however, does not happen overnight. It may take years of dedication and practice of good credit habits for you to achieve this, especially if you are rebuilding it. Most negative entries can stay on your credit report for up to seven years, and bankruptcies can last up to 10 years. That’s why it’s important to keep your credit in good condition.
The road to a good credit history is long. However, with patience and a responsible approach, you can get what you want and get all the benefits that come with it.