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Building credit can feel like a Catch-22. In order to access it, you need proof you can use it responsibly, like trying to get your first job without yet having enough experience to prove your capabilities to a future employer.
A thin credit profile doesn’t mean you’re destined to remain in that cycle forever, though.
There are several ways in which you can attain credit with little or no credit history, and some issuers even offer products specifically for people with no credit. Plus, new programs are making it easier to prove your creditworthiness to potential lenders.
But experts warn easy access to credit may be increasingly more difficult to attain in today’s credit market.
“Right now, lenders are increasing their minimum score requirements” in reaction to the economic recession triggered by COVD-19, says John Ulzheimer, a nationally-recognized credit expert with experience at both FICO and Equifax. “This means it’s harder to get approved for loans and to maintain existing credit lines.”
Even if you don’t think you need credit or loans, you should establish a credit history. Good credit can help you qualify for an apartment and get access to money when facing financial hardship without resorting to predatory lenders. And later on, it can help you reach long-term goals like financing a home with a favorable interest rate.
Before you fall for any scams targeting people with little credit history, here are a few ways to get started on the road to building credit.
Become an Authorized User
A common method for people with no credit to start building their credit score is by becoming an authorized user on a parent or trusted family member’s card account. As an authorized user, you’ll have access to the card account and may even have a card in your name, but the account owner remains responsible for paying the statement balance, even on your spending.
“I like the authorized user strategy,” Ulzheimer says. It’s relatively simple and can show results quickly. As long as you make sure the issuer reports to the credit bureaus, the authorized user account could appear on your report within 30 days, depending on the card’s statement cycle.
This is a common tactic for parents looking to give their children an early credit boost. You can name your child as an authorized user as a teen, and either restrict their access until they are older or begin teaching them to use credit cards responsibly. Either way, their credit score will benefit as long as you continue making timely payments.
Open a Secured Credit Card
“I usually tell my younger clients to apply for a secured credit card first,” says Luis Rosa, CFP and founder of Build a Better Financial Future financial planning firm in Las Vegas.
With this type of card, you will need cash on hand to submit an upfront deposit, which will act as your credit limit. Once you’ve submitted your deposit, your secured card works just like an unsecured credit card: as you spend with the card each month, you’ll make monthly payments and incur interest on any balance you don’t pay in full.
“There’s very little risk for the lender because the money is secured by the amount of money you deposit,” Rosa says. Before opening a secured card, check the terms of your agreement to ensure your issuer reports your payments and usage to each of the three credit bureaus. That way, your responsible behavior will show up on your credit report.
Some secured credit card issuers even offer the option to qualify for a non-secured card (one that doesn’t require you to put down cash upfront) after a series of on-time payments. Choose an issuer with other card options that fit your spending habits, so when you’re eligible to upgrade you can maintain your account history with the issuer, rather than close the account and take a potential hit to your credit score.
Look Into Student or Retail Credit Cards
Student credit cards and retail cards are other highly accessible credit cards for beginners.
Because issuers know students are often just beginning their credit journeys, someone with little or no established credit is more likely to be approved for student cards. If you’re entering college or working your way through school, student credit cards can be a useful tool, and may even offer discounts or perks targeted toward students. Keep in mind that many student credit cards require proof of enrollment to open.
Closed-loop retail credit cards can only be used at the issuing retailer. While these cards can be decent options for new credit card users, you should also be warned that they carry high fees and interest and, if you’re not disciplined, may encourage overspending on your credit line.
Open-loop retail cards, on the other hand, can be used anywhere but offer additional perks with the issuing retailer. These include cards like the Chase-issued Amazon Prime Rewards Visa Signature or Capital One Walmart Rewards Card. These cards may be a more financially savvy, but still accessible, option for credit building on your regular purchases.
Student and retail cards usually carry high interest rates, fees, and potentially low credit limits, making it even more important to pay your balances off in full each month to avoid extra costs. Always practice good credit habits so you help your score rather than hurt it.
Consider a Credit-Builder Loan
Credit-builder loans are another tool for increasing your score. These loans don’t work like typical lending products, though. You should view a credit-builder loan as a credit-building strategy rather than a way to access funds.
When you take on a credit-builder loan, you’ll be approved for a loan amount and a term, during which you’ll make monthly installment payments until you reach the total. During that time, your lender reports these payments to the credit bureaus. Only after your term is met will you gain access to the loan amount, which is often held in a savings account throughout the term.
New programs and self-reporting methods can be beneficial for consumers with little credit history. Look into methods you can use to report non-traditional payments like utilities and rent to boost your credit score.
You’re also obligated to pay interest on credit-builder loans. Interest on these loans can be high, so make sure you know your APR, or the real annual cost of your loan, before opening.
Use Credit-Boosting and Reporting Methods
In addition to payments that are traditionally reported to the credit bureaus, such as loans and credit cards, new programs allow you to opt in and share nontraditional financial information with the bureaus, which can help build your score within certain scoring models.
Programs like Experian Boost—which integrates utility payments into your credit report—and UltraFICO—which uses your banking activity—offer alternative ways to demonstrate your financial responsibility if you have difficulty accessing loans and credit.
In addition, while you can’t self-report your rental history, you can use a rent-reporting service or work with your landlord to report timely rent payments to the credit bureaus. These services often come with fees, including a one-time enrollment fee and monthly fee.
If you do decide to use credit-boosting tools or reporting services to boost your score, it’s important to know that your reported rent payments won’t affect every version of your credit report.
Make sure you read the details of which bureaus these services report to, and check which scoring models factor in these programs at all. For example, while newer FICO models can factor in reported rent payments, older—and most commonly-used—FICO models do not.
Building Healthy Credit Habits
It may be a long process, but once you manage to access credit, use it responsibly. If you can establish a good credit score, getting approved for any new line of credit is much more simple. For the most effective long-term solution, focus on getting your credit score to a “very good” range of 740 or above.
Start by determining where you stand. You can access your credit report for free from each of the three credit bureaus through AnnualCreditReport.com and view your score for free through your bank online or by purchasing access from a credit bureau.
“Know what you’re working with,” says Cristina Livadary, CFP, of Mana Financial Life Design, a financial planning firm in Marina Del Rey, California. “Knowing your credit score and knowing the changes that happen is really important. You’ve got to face your fears before you take action.”
Once you’ve established your current credit profile, here are some habits you can begin today to start increasing your score:
- Make all your monthly payments in full and on time. This includes credit card payments, rent or mortgage payments, auto payments, utilities, and any other regular, recurring bills. Even if it doesn’t directly impact your score, build a habit of making timely payments in full whenever possible.
- Pay off your card balances in full whenever you’re able. Avoid high-interest debt by not spending more than you can afford to pay in any given month.
- Avoid applying for several credit cards within a short time period. Too many applications can have a negative effect on your score, so be deliberate about applying and getting approved for cards over time.
- Keep your credit utilization ratio, or the amount of revolving credit you use compared to the amount available, under 30%. Then work to keep your ongoing utilization as low as possible.
- Continue using credit-boosting programs like Experian Boost and UltraFICO to get credit for your positive utility and subscription payment histories.
Establishing credit isn’t easy, but your hard work and diligence can pay off in the long run. In the meantime, begin building your credit using products like secured credit cards and practices like becoming an authorized user to establish good habits and begin proving your creditworthiness to lenders.