How to build credit if you have no credit history

How You End up Without a Credit Score

Nobody is born with credit. In fact, you won't have a credit score at all until you've had at least one credit account within the past six months. This is the reason most teenagers and young adults often have no credit at all. Unless your parents made you an authorized user or joint account holder on their bank account when you were younger, you won’t have a credit history, and therefore, you won’t have any credit.

It's possible to have bills you pay every month and still not have a credit score.

Not all companies you pay give a monthly report to credit bureaus which is why when you start building credit, there are certain things you should know about credit bureaus. For example, utility services, cell phone, and gym membership accounts aren’t reported to the credit bureaus and won’t help you build a good credit score.

Not having a credit score isn't necessarily a bad thing. Your credit score, whether it's good, nonexistent, or bad, isn't an indicator of your economic standing or financial health. You can have a high salary and still have no credit, especially if you always pay in cash and you’ve never had a credit card, loan, or bill paid late.

4. Use a Service to Report Rent and Bill Payments to Credit Bureaus

Rent and bill payments aren’t typically reported to the credit bureaus unless they are unpaid and go into collections. In other words, paying on time doesn’t help you build credit, but failing to pay can certainly hurt your credit.

Nowadays, however, certain services exist that allow renters and billpayers to have their payments reported to the three bureaus—usually for a monthly fee—to help them build or improve their credit.

By creating an account with a data furnisher like LevelCredit or PayYourRent, you can pay to have your monthly rent payments shared with the credit bureaus. Another service, known as Experian Boost, allows you to report other bill payments (like phone, utilities, and even streaming services like Hulu), although only to Experian, one of the three main credit bureaus.

Safety Notes

  • Some of these services cost money, and it's up to you to decide whether the benefits are worth the price.
  • Since rent and utility payments aren’t used as heavily as loan and credit card payments in credit reports, it is unclear how much of an impact reporting this information will have on your score.

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Make On-time Payments Every Month

Remember, qualifying for a credit account is only half the battle. You have to use your credit accounts responsibly to prove to future lenders that they can trust you. Most importantly, that means making a timely payment each month.

Your payment history is worth a whopping 35% of your FICO Score, the most popular credit score among lenders. That means that if you miss a payment, even once, your credit score can take a significant hit.

Late payments stay on your credit report for seven years, and though their impact will decrease over time, they can remain a big deal for a long time, especially if you’re late by more than 30 days. 

Keeping an emergency fund to cover your monthly payments should you ever lose your income is a great idea.

It’s also helpful to set up an autopay that makes your minimum monthly payment each month. While it’s always best to pay off your balances in full to avoid interest, an autopay will at least protect your credit score.

Apply for a Secured Credit Card

A secured credit card is the classic starter credit card. The card issuer uses a cash deposit as collateral to protect the card issuer from losing money.

The borrower has to fund this deposit after getting approved for the credit card. The amount of the deposit is usually equal to the credit limit on the card. 

Because the borrower can’t spend more than the lender has locked away as a deposit, the risk to the lender is minimal.

Many lenders offer secured credit cards specifically to people with poor credit, a short length of credit history, or no credit at all.

You should always investigate the details before applying for one, including the policy on graduating the account into an unsecured credit card. Some secured card issuers may return your deposit and upgrade the account to an unsecured card after six to twelve months of good payment behavior.

Can you have a credit score without having a credit card?

Yes, you can establish credit and have a credit score without a credit card. Credit card companies are not the only ones that report your payment and usage history to the three credit bureaus that report on your credit score, Experian®, TransUnion®, and Equifax®. Other actions, such as making repayments to a federal loan under your name to applying for a phone line (if the phone company reports to credit bureaus) can help build your credit score.

Start with a loan

If higher education is in your future, or you’re planning for a large purchase, another way to start building credit from scratch is by taking out a loan from a lender that reports to the credit bureaus. Generally, you don’t want to borrow money and pay interest solely to build credit. But taking out a loan for school or to finance a major expense may be a wise long-term decision if you prefer to avoid credit cards.

Here are some types of loans to consider.

Student loans

If you’re taking out (or previously took out) student loans, there’s a good chance you’ve already started building credit. Most types of federal student loans (as opposed to private student loans) don’t require a credit check, so you may be able to get approved even if you don’t have credit. But your loans will still get reported to the credit bureaus, which can help you build a credit history.

Credit-builder loans

Banks, credit unions and online lenders may offer credit-builder loans for people who want to build or rebuild their credit.

Similar to a secured credit card, the lender will hold onto funds that secure the loan. For example, you may take out the loan, but rather than receiving the money the funds get set aside in a savings account until you pay off the loan. The lender will report your account status and monthly payments to help you build credit, and once you’ve made all your payments, the funds are released to you. 

Keep in mind that credit-builder loans may come with an application fee, and you may be charged interest on the loan. But your security deposit may also accrue interest, which might help offset some of the costs.

Building credit from scratch? Check My Equifax® and TransUnion® Scores Now

5. Get credit for your rent and utility bills

If you don’t want to open a credit account or you’re having trouble getting one due to your lack of a credit history, you can instead start building credit by self-reporting the bills you’re already paying. Rent and utility bills don’t normally build credit, but if you subscribe to a bill-reporting service, they’ll be added to your credit report and will start to contribute to your score.

You might be able to get credit for:

  • Rent
  • Phone bills
  • Utility bills
  • Internet bills
  • Cable payments

You can build credit for free using Experian Boost, which allows you to add your regular bill payments (including streaming services e.g., Netflix, Hulu, and Disney+) to your Experian credit report.

Additionally, you can sign up for a rental reporting service like Rental Kharma or RentReporters to get your rent payments added to your credit reports. Signing up for one of these will allow you to add your bills onto your TransUnion and Equifax credit reports as well as Experian, although unlike Experian Boost, these services cost money.

1. Become an Authorized User of Someone Elses Credit Card

To use credit (i.e., to be the primary account holder of a credit account like a personal loan or credit card), an individual must be at least 18 years of age. However, there is a way that even those under 18 can get a head start on their credit-building mission—assuming they have an adult friend or relative who trusts them enough to risk their own credit score.

Many credit cards allow (and encourage) account holders to add “authorized users” to their accounts. An authorized user is a trusted person who has been granted access to an account holder’s line of credit. This allows the authorized user to circumvent the credit score requirements that are typically necessary for credit card approval so they can benefit from the account holder’s on-time payments.

Only the primary account holder is responsible for the credit card’s payments, but payments are typically reported to the three main credit bureaus (Experian, Equifax, and TransUnion) in both individuals’ names. This allows the authorized user to accumulate a credit history, which is the foundation of a credit score.

Safety Notes

  • This sort of relationship can be risky for both parties. An authorized user does not need to carry a card or make purchases to benefit from a primary account holder’s on-time payments, but they are legally allowed to, despite the latter carrying all of the liability.
  • A primary account holder can remove any authorized users from their credit account at any time by contacting the account’s administrator.
  • If the primary account holder misses payments or fails to keep their credit card utilization relatively low, the effect on the authorized user’s credit score could be negative instead of positive.

12 Ways to Establish Credit

Fortunately, establishing credit isn’t hard, but you need to learn some tricks that will improve your borrowing profile. Consider these techniques:

  1. Get a store card – Many retailers and gas stations will give you a branded credit card, even if you have no credit history. Use it, but don’t buy more than you would buy with cash. Pay off the entire bill at the end of the month. Ask that the department store report your credit history to credit bureaus.
  2. Apply for a secured-credit card at a bank – With a small deposit, say $500, you can obtain what’s known as a “secured” credit card, one that allows your bank to tap your account if you fail to pay a bill. Your credit limit will be the amount you deposited. Though the card isn’t useful for making big purchases – most secured credit cards have a limit under $500 – if you pay your bills on time and leave your security money untouched, you will begin proving your creditworthiness. That will enhance your credit score. Once you have a strong credit score, you can close the secured card account and apply for an unsecured credit card.
  3. Apply for a credit-builder loan – This is a loan used specifically to build a credit score. The lender will put the money you borrow into an account, and you’ll make payments on the money until the full amount is paid. The lender will notify the credit-rating bureaus as you make payments. When the loan is paid, the money is released to you and the credit bureaus have a basis for assigning your credit score. Credit unions and community banks are often the best places to check for this sort of loan.
  4. Find a co-signer – If you have someone with a good credit score who is willing to co-sign a loan, and you repay the borrowed money, that will build your credit score. Not everyone will be willing to co-sign with you, since the other party is personally liable if you fail to repay the loan. If they can’t make the payments after you default, it will damage both of your credit ratings.
  5. Become an authorized user on another person’s credit card – If you know someone – often a parent or close relative – with a good credit history who is willing to make you an authorized user on their card, your borrowing can help establish your credit credentials even though the primary cardholder is obligated to make the payments. If establishing a credit history is the goal, check with the card issuer to make sure that your activity on the card is reported to a credit bureau.
  6. Report rent and utilities payments to credit bureaus – Rent reporting services like Credit Karma will add rental payment in your credit history. If you pay on time, it can help build you credit score. On-time payment of utility bills is a score builder. You should ask your phone, water, electric, gas or cable company if they report your payments to credit bureaus.
  7. Consider a student credit card – If you spend conscientiously, student credit cards designed for young borrowers can be a way of building a credit history. These introductory cards have disadvantages, including low borrowing limits and higher interest rates. You shouldn’t apply for one of these cards unless you are confident you have the money to meet the monthly bills.
  8. Make on-time payments every month – The golden rule for anyone building a credit history and credit score is: PAY ON TIME! That is, by far, the most important component in calculating your credit score. If you’re 90-180 days late making payments, you’re account could be turned over to a collection agency and that could be very damaging to your credit score. Paying on time is just a good personal and financial habit to form.
  9. Don’t use too much credit – The second biggest component of your credit score is how much of your available credit you use. The goal should be to use less than 30%. That means if you have a $1,000 card, don’t have more than $300 worth of charges on it.
  10. Go easy on the number of cards – It’s obviously smart to start with just one credit card and add another later, at least six months later, if you need it. If you apply for two or three cards at the same time, it sends a signal that you might be getting desperate.
  11. Be aware of identity theft – Look at your monthly bills to verify that you are the one who made all the charges on it and not someone who has stolen your identity. You also can receive a free credit report from each of the major credit bureaus every year to make sure all the activity on it belongs to you.
  12. Credit history matters – If possible, keep accounts open once you have them. If your card doesn’t have an annual fee and you don’t need it, put it in a safe place rather than closing the account. This can help your credit utilization rate, since it is computed using the combined borrowing limits on all your cards.

Properly Managing Your Credit: Demonstrate Fiscal Responsibility

Once you have access to a line of credit – whether through a loan or credit card – the next step in the process is to demonstrate fiscal responsibility. A FICO score is a measure of confidence that the company has in your ability to pay back loans or debt. Following the steps outlined in this section will help your credit history prove that.

Make On-Time Payments

One of the biggest factors affecting your credit score will be how often you miss or are late on payments. Most of the steps outlined in this guide will fall back on this crucial measure. If you are late on payments, or miss them completely, your financial institution will report this behavior to the credit bureaus, which may then add derogatory marks on your credit. Opening credit accounts is useless for building credit if you will not pay your bills on time so make sure you are always keeping in line with this step. Even a single missed payment flushes months of credit building down the drain.

Typically, your credit card due date will be the same every month, which should help a consumer keep track of when they need to make a payment.

Keep Credit Utilization Low (Below 30%)

Credit utilization is the percentage of your total available credit that is being used month-to-month. For example, if you have a total credit limit of $1,000, and carry a balance of $500, your total credit utilization is be 50%.

In order to raise your FICO score, you should ideally keep your credit utilization at 30% or less. This 30% figure is just a good guess, based on the observations of experts in the industry about what FICO may view as ideal. You may alternately see estimates that place this figure at 20%, and others even urge consumers to keep utilization below 10%.

Conversely, if your utilization is too high (60%+) it can begin to lower your credit score.

Avoid Derogatory Marks

If you were involved in any negative financial situations in the past, those were more than likely reported to a credit bureau and form part of your credit history. Examples include things like bankruptcies, foreclosures, collections, tax liens, and civil judgements.

Such derogatory marks usually remain on your account for a long time, usually between seven and ten years. The only exception are tax liens, which can remain on your account indefinitely. These will appear on your credit report when you have failed to pay a tax debt. In the case of a federal tax lien, it is possible to have it withdrawn if any or all of the following apply:

The IRS paperwork wasn’t in order when it was submitted (rather unlikely). You are paying off the lien in installments (which depends on the type of repayment plan you have). Withdrawing the notice will make it easier for you to pay back the debt. Such a withdrawal is in the best interest of both the US government and you. This is the most ambiguous of the reasons given.

If you satisfy any of the above mentioned conditions, you should file a 12277 Form with the IRS. If accepted, the agency will remove the public notice. You can then report the removal to the credit bureau, which will raise your FICO score. You can read more about federal tax liens on the IRS website.

All other derogatory marks on your credit report will remain there for close to a decade, unless you are able to prove they were a mistake or if there are legal developments. If a civil judgement, for example, resulted in a settlement, or was successfully appealed, you may be able to submit proof of this to a financial bureau.

How to Get Started Establishing Credit

When you have no credit, you're more likely to have your applications approved than when you have bad credit. But, it can still be tough. If you’re under age 21, you’re required to list your income or have a co-signer to get approved for a credit card.

You can start building credit without a credit card, but it means you’ll need to take out a credit builder loan. If you have student loans that you’ve started repaying or will start paying soon, these can help you start building a credit history. You can also ask a parent to add you as an authorized user to one of their credit cards. Their account history can help you qualify for credit on your own.

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