Ever heard that having no credit can be as bad or worse than having bad credit?
Without any kind of record of borrowing or paying bills, you may find lenders reluctant to give loans, being able to get loans at a good rate or even having restricted access to certain services like home internet or cellphone service.
If you are trying to build up your credit (or perhaps simply improve your credit), the following steps are simple, easy ways to start your credit journey. They can also be helpful to get your credit back on track if your credit score is lower than you would like it to be.
- Get your Free Credit Report
- Open a Credit Card
- Become an Authorized User on a Credit Card
- Take Out and Repay Small Loans
- Get Bills Put in Your Name
- Pay Bills On Time
Even if you think you do not have any credit to begin with, getting a credit report is always the first step. It lets you see if there are any credit dings that you might not be aware of as well as giving you a solid overview of what the credit bureaus look for in establishing your credit score. You may be surprised to see that some things as simple as paying utility bills on time count towards building a positive credit score.
Credit reports are also free and there are several ways to get one. You are allowed to receive a free credit report from TransUnion, Experian, and Equifax once annually. You can also find free credit reports through services like Credit Karma, and even your bank or credit card (if you have one), often have a service that offers a free score.
If you find something on your credit report that raises an eyebrow (say, a credit card opened that you did not open), you can dispute issues directly with the given credit bureau online.
An easy way to start building your credit is to open a credit card. A new credit card increases your ability to borrow (which is determined by your credit to debt ratio), which in turn helps build your credit score. Using your credit card and paying off the balance every month also helps build your credit, as on-time payments are actions that can build your credit score as well.
If you are just starting to build your credit, you may find it difficult to get approved for a credit card. If that describes you, check with whichever bank you have your checking or a savings account with. They will usually approve a credit card for you, though it may have an extremely restrictive credit line (usually $500). However, as we mentioned, consistently using the card and paying the complete balance off on time will gradually build your credit.
If you have no credit (or even bad credit), it is possible that you will be unsuccessful in getting approved for a credit card. However, there is a workaround for this that will not only grant you access to a credit card but will also help you build your credit. Become an authorized user on someone else's credit card!
When you are an authorized user, you are not the primary cardholder. However, whenever the primary cardholder makes on-time payments, your credit score also gets a bump from it! However, this method is a double-edged sword, so you need to make sure that you choose someone who is financially responsible. Should the primary cardholder miss a payment and it gets reported to credit bureaus, your credit score will also take a hit. Choose wisely!
This method is pretty roundabout, but it is a great choice for those that are facing roadblocks elsewhere. You can take out small loans from your bank, even using savings as collateral. Then, use that money to pay the loan back over the life of the loan. This method will cost you a financing fee, so you will generally only want to do this with $1000 or $2000 loans.
This is a great method if you share a living space with roommates or a significant other. Paying utility bills consistently and on time helps build your credit score, but only if they are under your name! If you are able to get an apartment lease, water, or electric utility under your name (something you may already be paying for), it is a great way to build credit.
This, of course, can come with risks. If you have no credit or bad credit, a deposit may be required to have utilities or other bills put in your name. Also, if your name is on a utility but your roommates do not pay their share, then late or missed payments fall on you, not them, and late or missed payments can hurt your credit score.
This method is the most common sense, but it works! Paying bills on time, not just loans, will gradually build your credit. This includes utility bills like electric or gas, cell phone service, home internet service, mortgage payments, and car payments. Late payments on any of these services can be reported to credit bureaus and can impede your ability to grow your credit score.
Deciding which bills to pay can be a strategy to help maintain your score once you have built it as well. Certain businesses will report late payments much more quickly than others. For example, your mortgage lender will almost always report a late payment, whereas your water utility may not unless it is substantially late. Pay the bills that report to credit bureaus first to help maintain the credit score you have been working so hard to build!
These easy steps are great ways to start building your credit. it is always best to build good credit early than having to go back and try to fix bad credit. Maintaining a healthy budget and being responsible with expenditures will go a long way to make sure your credit stays strong.
