Applying for student loans, business loans, home loans, and more all require one thing: an established credit history.
Creditors can look at your credit history to determine whether or not you will be able to pay back a loan – whether that be a personal loan, a credit card, or mortgage payment. If you have paid back loans reliably in the past, you should be able to pay them in the future. Seems simple enough, right?
Unfortunately, an estimated 26 million Americans were recently considered credit invisible. This means that they have no credit history or credit reports. Credit invisible consumers are often residents of lower-income areas or part of underprivileged groups; this often includes individuals such as:
- Recent immigrants
- Young people
- Undocumented workers
- BIPOC and Hispanic individuals
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?
Related: What is a FICO® Score?
In This Article
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
This doesn’t mean you aren’t deserving of credit, just that the lender doesn’t have sufficient information to make that decision.
Being able to prove creditworthiness is the first step in approval for any type of loan or credit card. Even many utility companies require a credit history in order to open an account. It is essential that if you think you’re at risk of being credit invisible, you take the next steps to establish credit.
How can you establish credit history?
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.
It is important to practice good habits throughout your credit journey
Once you have taken any of these steps to establish a credit history, it is important to continuously practice good credit habits. Opening a credit card, secured or not, comes with the responsibility of paying off the card each month to avoid added interest fees. If you’re using a rent-reporting service or Experian Boost, lenders will be able to see your payment history. If you have a history of late payments, you may be less likely to receive loans in the future.
In order to ensure you meet your financial goals, it is important to make your credit card payments on time, and always meet the minimum payment requirements when you can. Additionally, we recommend that you keep your credit card utilization low – below 30% when possible. The lower your utilization, the better your credit score.
Establishing a credit history is just the beginning of your credit journey. Practicing good ongoing credit habits will help you keep your credit score high and your financial stress low. These habits will contribute towards your ability to receive student loans, mortgage loans, personal loans, and more — ensuring you will have the freedom to build the life you want to have.
Results not guaranteed.