If you’ve never had a credit card or a loan, your credit history is most likely a blank slate. Your credit history, as documented on your credit report, is a record of how responsibly you’ve repaid money you’ve borrowed.
Creditors and lenders use your credit history to make decisions about whether to give you a credit card or extend a loan. However, if you have no credit history, there’s no record of how you might manage debt. As a result, many creditors and lenders won’t lend you money.
It may seem like an impossible loop, but there are ways to build credit when you have no credit. Here’s how in six easy steps:
A secured credit card is just like a “regular,” or unsecured credit card, only you are required to put down a security deposit – typically $300 to $500 – to provide assurance to the creditor that you will repay your debt. Your credit limit is often the amount of your security deposit, or a percentage thereof.
Many people confuse a secured credit card with a debit card, however the two are very different. First, banks do not report debit card usage to the credit bureaus, as a debit card is not an extension of credit. A debit card is merely a convenient way to access the funds in your bank account.
Creditors, on the other hand, do typically report secured credit card activity to the credit bureaus, as a secured credit card is an extension of credit. Your purchases are not deducted from your security deposit. Rather, each time you charge something, you are effectively borrowing money from the credit card company and are obligated to repay that debt. As a result, how responsibly you use a secured credit card will affect your credit score – both positively and negatively.
2. Only charge what you can afford to pay off in full.
Building credit means consistently demonstrating your ability to pay back any money you borrow. Your goal is to prove to creditors and lenders that you can responsibly manage debt. That’s why it’s smart to start small – only charge purchases that you can afford to pay off in full every month.
Unfortunately, it’s not enough to open a credit card – secured or otherwise – and sit on it. If you don’t use your credit card, you’re not demonstrating anything. Use your card at least once a month for small purchases like inexpensive meals, gasoline and drug store essentials. Try to not charge more than 50 percent of your credit limit in a given month however, as that can take a toll on your credit score.
3. Pay on time every month.
The most important thing you can do to build and maintain a good credit score is paying all of your bills and debt obligations on time every month. Even one late payment can significantly damage your credit score, especially early on.
4. Avoid applying for numerous accounts.
Each time you apply for a credit card or loan, your credit score takes a small hit. And there’s no point to chipping away at a credit score you’re trying to build up, especially when you haven’t yet demonstrated that you can handle just one credit card. Instead, use that energy to prove to yourself that you can keep the balance low on one credit card and pay the bill on time every month.
5. Check your progress by checking your credit report and score.
After six months of timely credit card payments, check your status by viewing your credit report and score. Pay special attention to what is on your credit report and any positive or negative factors listed, so you have a better idea of what you need to work on next. Also make sure to take a look at your credit score – it will help you make sense of your credit report and give you an idea of how well you’re doing.
6. After a year, apply for an unsecured credit card.
Twelve months of timely payments should be enough to show your credit card company that you can responsibly manage debt. Now’s the time to give your creditor a call to see if you can make the switch from a secured credit card to an unsecured credit card. An unsecured card frees you from your security deposit obligation, will likely carry a higher credit limit and may offer useful perks like reward points.
The key to building credit is patience. Remember that having a good credit score is like having the world’s best coupon book for all the biggest financial transactions in your life. It may take time to establish good credit, but once you do, you’ll reap the benefits of big savings.
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