Credit is a paradox: you have to have credit to get credit. Establishing new credit can be a pain, but for those just starting out in the world or immigrants new to America, it’s one of the most important things they can do to set themselves up for future success.
In This Article
Establishing New Credit
There are several ways of establishing new credit from a clean slate.
Credit builder loans
Credit builder loans are an outstanding option for those who want to establish a credit history quickly, so long as you have the income to make the payments. You take out a loan, but the bank holds the loan balance in a special account while you make loan payments. When you’ve complete paying the loan, they release the funds to you. This gives you a chance to build credit and also works as a form of savings.
Credit builder cards
Similar to credit builder loans, credit builder credit cards allow you to build your credit.
Some types of credit builder cards, known as secured credit cards, require you to deposit a sum of money with the bank. You then receive a credit card with a spending limit equal to the amount deposited. While it’s not specifically a credit builder card, the Prosper Card® is great for those with less-than-perfect credit because it doesn’t require an initial security deposit. It starts with a low credit limit, limiting risk and keeping you from getting over your head.
Either way, using a credit card helps you build up a payment history. Use your credit builder card for everyday purchases and pay it off each month. You’ll likely see a significant rise in your credit score.
Get credit for your everyday bills
Services such as Experian Boost report your utility bills, phone bills, etc., to your credit report, giving you a slight score boost. Also, some rent-reporting services, such as Rental Kharma and LevelCredit, report your rent payments to your credit report. These may not be enough to establish credit on their own, but they will help you boost your score in concert with the other methods listed here.
Become an authorized user on an existing account:
Suppose you have a family member or friend with good credit. In that case they can add you to their existing credit accounts as an authorized user, allowing you to ‘piggyback’ off their credit and supercharge the process of establishing new credit. However, this is not without risk for either party. The other party is trusting you not to run up their credit card balance, and you’re depending on them to make their payments on time and maintain a low balance to build your credit. If they make late payments or have a high balance, that will reflect on your credit. This is an option to use only after careful consideration.
Follow these steps, and you’ll have an established credit history in no time! Good credit helps you reach many common financial goals, such as homeownership and access to financing for purchases or life events. For example, with a good credit score you can take advantage of Prosper personal loans for healthcare expenses, home improvements, or many other purposes, giving you enormous flexibility!
How to Establish Credit History
Applying for student loans, business loans, home loans, and more all require one thing: an established credit history.
Without a credit report to validate dependability, it’s harder to receive loans, get approval for credit cards, or even rent an apartment. You need credit to build credit, so where do you begin?
Why does credit invisibility matter?
Credit invisibility happens when a person has no credit history and therefore becomes “invisible” to a lender. If you haven’t borrowed or repaid money in the form of loans, credit cards, or other types of consumer credit, you may be credit invisible. This means that lenders don’t have any information to go off of when deciding whether to lend you money—which usually results in you not being able to get approved for loans.
Being credit invisible can affect your ability to:
- Rent a house
- Buy a car
- Take out an insurance policy
- Gain access to utilities
- Get hired for some jobs
Establishing credit history can seem like a challenge. How do you establish a credit history when lack of credit makes it nearly impossible to borrow money? Fortunately, there is no need to feel stuck or discouraged. There are several options you can take to begin to establish credit history. These will also help build your credit score, and you’ll be well on your way to achieving your financial goals.
Bear in mind that it takes time to build credit. It won’t happen overnight. But the sooner you start, the sooner your credit will begin to show the results!
- Become a cosigner or an authorized user on an existing account: As an authorized user, you are able to begin to progress toward building a robust credit history without much added risk. A family member or friend with excellent credit history can make you an authorized user on their account. This means they add you to their credit card account and use it to make purchases. The responsibility to pay off the card each month falls on the primary account holder. You can pay them directly for the purchases you make. It is important to make sure the primary account holder is someone who never misses a payment – otherwise, this could negatively impact your credit score.
- Open a secured credit card: Secured cards are a great option for someone looking to obtain their first credit card. The difference between your typical credit card and a secured credit card is with a secured card, you must put down a security deposit when opening the card. The deposit acts as collateral if you ever miss a payment. Further, the deposit made typically becomes your credit limit. This can be helpful for beginners learning how to navigate credit card spending. Deposit aside, a secured card acts just like traditional cards. All actions taken with the card are reported to the credit bureaus.
- Open a store card: Many experts warn against opening a store card. Their interest rates are typically much higher than a traditional credit card. However, if you pay off your card each month and avoid interest charges, this can be a great option for those looking to establish a credit history and avoid credit invisibility. Store cards are usually easier to qualify for and often come with benefits, like store discounts and sign-up rewards.
- Get credit for the bills you are already paying: There are ways to build credit without opening up a credit card. Some rent-reporting services, such as Rental Kharma, can add your payments to a credit report, helping to establish creditworthiness and build a history of on-time payments. Additionally, Experian Boost does the same thing with your utility bills. Experian reflects your utility payments (such as your phone or internet bills) in your credit report, further building and establishing your credit history.
- Seek a credit builder loan: This type of loan is just what it sounds like. It’s a loan to help you build credit. A credit builder loan is similar to a savings account, except you won’t be able to access the money right away. With a credit builder loan, you borrow a small amount the lender keeps in an account you can’t access. You will then make monthly payments until you’ve paid the full amount. After you’ve paid off the loan, the full account (and any possible interest it may have accrued) will be turned over to you. Each payment will be reported to the credit bureaus, helping you to establish a history of on-time payments.
Building Credit Well
To maximize the effort you put into establishing new credit, it’s important to build a good credit history—not a bad one. Therefore, in any of the options listed above, it’s crucial to do a few things:
- Make your payments on time: This is critical, as it’s the single biggest variable in your credit score.
- Keep your balances low and pay them off each month: Your credit utilization ratio plays a part in your credit score. Paying balances off in full each month avoids expensive interest charges in most cases.
- Monitor your credit report: Lenders, creditors, and credit bureaus can make errors. Take advantage of your free credit report every year from each credit bureau. Check and ensure that your efforts to build your credit reflect on your credit history. Also, this helps protect you from identity theft. If you see items that are incorrect or that you don’t recognize, you can dispute them.
- Budget carefully: While building your credit history, establish good financial habits to help you maintain good credit into the future! Create and maintain a budget to make sure you pay everything on time and stay in control of your finances.
Results are not guaranteed.