In this day and age, it’s easy to feel overwhelmed when it comes to finances. People are talking up crypto, blockchain, NFTs, and how someone somewhere spent nearly half of a million dollars for virtual land next to Snoop Dogg’s virtual house in a virtual universe. It’s important to remember: Everyone started somewhere. Credit always seems to be the center of the finance conversation, and if you don’t have a credit history, it can feel like you’re already behind. However, there are ways to build credit if you don’t have credit. The key is to get started so that you can set yourself up for financial success later on.
Does It Matter That You Don't Have a Credit History?
There are arguably worse things in the world than having little or no credit history. But you should know that having something in your credit file can give you access to a lot more financial opportunities than you currently have. This will open more doors for you when you make decisions in your personal and professional life.
When you have few — or no — accounts listed on your credit report, you are said to have a thin credit file. These accounts can include credit cards, student loans, a mortgage, business loans, or monthly bills reported by your service providers to name a few.
The information on your credit report is used to calculate your credit score. If there is not any credit information in your report, it makes it difficult or impossible for credit scoring agencies to calculate your score.
It also means that credit card companies and loan providers don’t have much information on which to base their lending decisions. Normally they look to your credit score to see what kind of borrower you’ve been in the past and whether your payment history and credit utilization would make you a strong candidate to loan money to. If you have a thin credit file, you become more of a risk. Unfortunately, this can get you disqualified from certain credit card and loan offers.
How to Build Your Credit
So how do you go about building a credit history so that you don’t miss out on financial opportunities? There are a few places that you can start.
Apply for a secured credit card
It’s called a secured credit card because it requires an upfront security deposit that the financial institution will keep if you default on your payments. It’s also why secured credit cards are popular among consumers with little to no credit history — if someone doesn’t have a credit history to back up their financial habits, the deposit acts as monetary insurance that the issuer will not be out any money if you miss your payments.
You can get a secured credit card through many major banks and credit card issuers. Think: Bank of America, Capital One, Wells Fargo, and Discover.
The required deposit varies based on the issuer and the credit card. However, you can count on it covering the credit limit of the card. For example, if your deposit is $200, you can expect the credit limit, or the maximum amount that you are able to put on the card, to also be $200.
In order for a secured credit card to positively impact your credit score, the same rules apply as an unsecured credit card. First, you must make on-time payments. It’s even better if you make your payments in full so that you do not accrue interest.
You also must maintain a healthy credit utilization. Credit bureaus advise you to keep your credit utilization ratio below 30%. For instance, if you have a secured credit card with a credit limit of $200, you should only ever have a balance of $60 on the card.
$200 x 30% = $60
Take out a credit builder loan
If you don’t have a credit history, credit builder loans, similar to secured credit cards, give you access to borrowed money so that you can prove your creditworthiness and ability to make on-time payments.
With a credit builder loan, the financial institution approves you for a certain loan amount. That loan is then held in a bank account while you make payments. Like with other loans and credit cards, your payments are reported to the credit bureaus and added to your credit reports. When those payments are on time, they positively affect your credit score. If they’re late or missing, they negatively affect your credit score.
Credit builder loans are typically offered by smaller financial institutions, such as credit unions and local banks.
Become an authorized user
If you’re not in the place to open an account with your own name, you can become an authorized user on someone else’s account. Keep in mind that adding someone to an account is a huge risk and responsibility for both parties involved — the primary account holder and the authorized user.
From the point of view of the authorized user, it’s important to choose your primary account holder carefully. If they manage their accounts poorly, it’ll end up harming both of your credit scores.
The other side of the coin: The primary account holder acts kind of as a lender in this situation. In their eyes, you don’t have much experience with credit, so you’re a huge liability for them. If you miss payments or overspend using their account, you could get them into financial trouble.
When you ask someone if you can become an authorized user on their account, be sure to come prepared with a plan for how you’ll make on time payments and use the account responsibly. That way both of your credit scores will benefit.
Take advantage of your bills
You’ve got to pay bills anyway — why not get a credit boost while you’re at it? Not all service providers offer this, but some, like utility companies and cell phone billers, do. They’ll treat your bill payments as any other lender or credit card company would and report your payments to the credit bureaus.
Payment history accounts for 35% of your credit score. If your payments are time, you should see a pretty good jump in your credit scores. If your payments are late, they’ll unfortunately hurt them.
If your service provider reports payments, it’s important to make sure that your payments are actually getting reported and that they’re getting reported accurately. Sometimes even billers make mistakes. Take advantage of your one free credit report per year to check your credit history and confirm that all of your bill payments have been reported accurately. If they haven’t, it’s best to reach out to the credit bureau and your biller to get the issue resolved.
Advantages of Having a Credit History
While your credit score is not the end all be all, it does help you score better deals, rates, and terms. That goes a long way. It means less money, time, and energy will be spent on interest, fees, and sub-par service. Instead, you’ll be able to put that money, time, and energy toward a better financial future.
Access to better credit cards with lower fees
Once you build your credit history, you’ll begin receiving offers for cards with competitive perks and rewards — no annual fees, foreign transaction fees, or balance transfer fees. Credit card companies know that fees are a turn-off, so they waive them if you have a solid credit history in the hopes that they can convert you into a customer.
You should be careful not to jump at every credit card offer that comes your way. It’s easy to fall into the “shopping momentum effect”, where you start shopping and can’t stop. That’s a simple way to rack up credit card debt. That said, if you’re good at controlling impulsivity, credit cards can be a good way for you to continue building your credit history and spread your utilization across multiple cards.
Higher likelihood of loan approval
Your credit score determines whether you get approved for a loan at all. That goes for mortgages, auto loans, student loans, personal loans, business loans, and so on. If your credit score is too low, you are considered a risk for the lender, which could disqualify you as a candidate altogether. The higher that your credit score is, the more likely you will be to get approved for the loan — better yet, you could get pre-approved and avoid the hassle of shopping around.
Better interest rates and terms
And once you do get approved for a loan or credit card, you can score much lower interest rates and terms the better that your credit history is. You automatically have access to top-tier APRs, credit limits, and low-to-no-cost fees on credit cards, loans, and other lines of credit. Lenders will compete hard for your business, which you can use to your advantage when negotiating better terms.
If you get approved for a credit card and then your credit score improves after some time, you can ask your issuer to re-run your credit check to lock in a lower rate. The financial institution is not obligated to adjust your APR, but if you stay on top of it, getting your interest rate changed could end up saving you a ton of money in the long run.
Lower insurance premiums
Insurance providers have a vested interest in your credit history and scores as well. In general, you can’t be denied insurance because of your credit score; however, insurance companies do look to your scores to set your premiums. The higher that your credit score is, the lower you can expect your premiums to be.
More options for rentals, jobs, and financial services
It’s important to future employers, leasing agents, utility companies, and phone providers that you have a strong credit history before you sign on as an employee or customer. Your credit report and credit score is not just an indication of how you’ve handled debt, but how you’ve managed your time, money, and responsibilities in the past.
Having a good credit score will afford you more options to rent, work, and become a customer. In addition, different companies can reward you with lower or waived security deposits, better monthly payments, and new products or services at no additional cost if you have a positive credit history.
Thin Credit vs. Bad Credit
Thin credit is not the same as bad credit. When you have bad credit, there are credit accounts in your portfolio — you might just have a poor history of managing them. You might not have paid your bills on time. Or you might have defaulted on debt obligations, or had accounts sent to collections.
When you have thin credit, there are too few credit accounts in your portfolio to tell whether you are good or bad with credit.
In both situations, it can be tough to boost your credit score. With a thin credit file, you’re essentially starting from scratch and usually forced to find ways to improve your credit score through avenues that don’t require you to already have a good credit score.
With bad credit, on the other hand, you’ve established what kind of borrower you are. Unfortunately, some bad marks can stay on your credit report for 7–10 years. If you’re working to improve your credit file and scores, you will have to work twice as hard to overshadow those negative marks and reestablish your credit image in the eyes of lenders.