Don’t have a credit history? Consider yourself lucky! Starting from scratch is the perfect opportunity to build exactly the kind of financial future that will set you up for success and help you reach your financial goals. Here’s what you need to know:

Why Do You Need Credit?

You may think that you don’t need a credit because you live within your means, and you don’t want the temptation to spend what you don’t have. It’s always smart to live within your budget and avoid the trap of overspending, but it may be helpful to reframe your mindset when it comes to credit.

Something as simple as getting a credit card can be the start of establishing a strong credit history which can affect just about every aspect of your financial life. A credit card can establish and build your credit history for when you need it.

What is the purpose of having good credit?

Having good credit isn’t just about applying for loans. Good credit can enable you to be able to rent the apartment you want, set up the utilities in your name without a required deposit, and even reduce the cost of car insurance. By building credit, you’ll be participating in the American financial system, opening doors to many aspects of your life. 

Doesn’t having credit mean I need to be in debt?

Not at all. In fact, the people with the best credit scores often have little or no debt.  What they do have is a long history of making on-time payments, which can be done by using a credit card wisely and not building debt.

 

 

What Happens if You Don’t Have Credit?

The temptation related to credit cards is real, especially when money is tight, and you shouldn’t take on loans without a good reason, but having no credit may not make you better off. Credit is a tool; when you use it wisely, it can give you a financial advantage in life.

Some non-prime consumers encountered serious roadblocks because of poor credit or lack of it:

  • 37% say their lack of credit keeps them from making progress in life
  • 6% were turned down for a job because of their credit scores
  • 12% were denied an apartment

Starting with a Blank Slate: How to Establish Credit

Building your credit history may take a few months, but getting started is easy and you have options.

Become an Authorized User on a credit card

An authorized user is someone, like a spouse, child, or friend, that is added to the established credit card of someone else. Being added as an authorized user will allow you to reap the rewards of months, or even years of timely payments. It’s a great way to start establishing credit — and anyone can do it. Here’s how:

Find someone you know and trust who already has a good, established credit history. When you become an authorized user, the payment history will be reported to your credit report. On-time payments can help you establish your own history, but late payments will ding your credit score, just like if you had your own credit card.

As an authorized user, you can use the credit card as if it were issued to you. So make sure you and the credit card holder both understand the implications and agree to an arrangement that covers the monthly expenses.

Build Your Own Credit History

Rather go it alone? Many credit card companies are willing to work with consumers who are new to credit, but you may have to opt for a secured credit card (where you put down a security deposit and receive an equal credit line) or a lower limit. Don’t worry, your limit can always scale up as you establish your history.

While having a credit card will help you establish credit, you should start small. Having one or two credit cards with limits of $200 to $500 is more than enough to build your payment history.   

Another option is a credit building loan, which is a small loan that is deposited into a secured savings account.  You make payments on the loan each month like you would any other loan, and the payments are reported to credit bureaus.  After the loan is repaid, usually over the course of six months to two years, you are given access to the savings account.

How to Build Great Credit

Once you have access to your first credit product, building a great credit history (and credit score) is within reach. If you choose a credit card, just follow these three steps:

Step 1: Only charge what you can cover in cash.

Track your expenses regularly so you know you can cover in cash what you put on your credit card each month. It’ll help you stay out of debt, and you could potentially save thousands over the life of your credit card if you’re able to make your payment in full each month before the interest kicks in.

Step 2: Make payments on time.

Set a reminder to make your payment by the due date each month. If you’re comfortable with it, set up automatic payments through your credit card provider so you’ll be on-time without the hassle. Paying your bills by the due date is essential to building a great credit history. Just make sure you know exactly when the payment will come out of your account — no one wants to deal with added overdraft fees.

BREAKOUT TIP: Worried about being tempted by a shiny new card with a high limit? Put it in the freezer, or in any place where it is hard to get to. But first, put a monthly bill on it, something small with a predictable amount like a subscription, and set up automatic payments for both the bill and the credit card. This will build your credit history and ensure you make on-time payments while only spending what you would normally.

Step 3: Keep accounts open even if you don’t need them.

Closing a credit card can impact your credit score because it will temporarily lower your credit limit total and increase your credit utilization. Closing the accounts you’ve had the longest can also affect your credit score by lowering your credit age.

If you are working on your credit with a loan, here are two things to remember:

Step 1: Make sure the payment is within your monthly budget.

The most important thing to do is prepare. Before getting a loan of any type, even a credit building loan, make sure the monthly payment fits easily into your monthly budget.

Step 2: Make payments on time.

Set a reminder to make your payment by the due date each month. If you’re comfortable with it, set up automatic payments with your lender or your bank so you’ll never be late. 

THE KEY: The value of credit is not to be able to spend more now. It’s to reduce the cost of financing big-ticket purchases in the future, like a car or a home.

What’s Next?

Be patient. Building credit and establishing a good credit history takes time. Concentrate on maintaining healthy financial habits, and this will all seem automatic. And don’t panic if you see your credit score impacted by a new account.  These changes are often temporary and quickly overcome with on-time payments and low card balances.

How to Keep Building

Once you have reached the point where you have a few credit accounts under your belt, it’s important to remember the golden rules:

  • Always pay on time.
  • Keep balances low.
  • Only add new credit when you need it.