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March 3, 2020

How to Build Credit When You Have None

How to Build Credit When You Have Non

Photo by Andrik Langfield on Unsplash

If you haven’t yet begun to build credit, it might seem intimidating to think about building it from scratch. But fear not: whether you have excellent credit or no credit at all, your behavior shouldn’t be drastically different. That said, in this post, you will learn how to build credit when you have none.

Avoid Late Payments

This is mentioned first because it is the most important step you can take in building your credit. According to myFICO, “A credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history).” When you view it from this perspective, you can see why avoiding late payments is so important.

After all, if you are frequently late when repaying your debt, you are signaling to creditors that making payments may be difficult for you. In general, late payments increase the chance of default while decreasing the chance that you will pay back creditors.

Plus, making your payments on time allows you to form good habits. Eventually, paying on time will become second nature and something you do without even thinking about it.

Apply for a Student Credit Card

If you are currently enrolled as a college student, there are several credit cards specifically intended for you. Student credit cards are a great option because not only do they have less stringent approval criteria than non-student cards, but they have some very nice benefits, too.

Unlike the options mentioned below, however, you would have little to protect you if you find yourself struggling to pay the card off. Thus, it’s important to be diligent in keeping up with payments and not get behind if you choose this option.

Get a Secured Credit Card

In general, a secured line of credit is one for which you provide collateral in exchange. In the case of a secured credit card, you usually make a security deposit (much like you would on an apartment).

In doing so, you provide something the creditor can reclaim in the event you default and are unable to repay your debt. For an apartment, a security deposit is often equal to one month’s rent. When dealing with secured credit cards, the deposit is usually equal to your credit limit. This way, the creditor can recover the full amount in the event you are unable to make your payments.

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Become an Authorized User

This option is particularly good for those who have never had a credit card because it allows you to be added to someone else’s line of credit. This is typically a family member or someone with whom you are close.

Doing so is a great way to build your credit because you don’t even have to use the line of credit in order to benefit. If you are added as an authorized user for a credit card, and it remains in good standing, it shows that you are not a credit risk This can actually help your credit history - whether you use the card or not.

Just be sure your activity is being reported to the credit bureau in order to benefit from this arrangement. You verify this with the card issuer.

Start Small

If you are new to owning credit cards, it’s best to start with one card and use it to slowly build your credit. You may decide to apply for additional cards later down the road (such as a travel card), but it’s best to exercise healthy habits with one card first.

Opening too many cards too quickly could harm your credit history (at least in the short run). Each time you apply for credit, you will incur a hard inquiry on your credit report. Hard inquiries temporarily lower your credit score, and too many credit inquiries can make you look like a liability.

As you can see, there is little reason to dive directly into the deep end when you are new to owning credit cards. Start in the shallow end and ease your way in!

Bob Haegele

Bob Haegele is a freelance personal finance writer.  He runs The Frugal Fellow, a blog that helps people with their student loans in addition to saving money and budgeting.  You can follow him on Twitter @Thefellowfrugal.

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