Many young adults have wondered how to build credit when you don’t qualify for anything with no credit history.
This can be a very frustrating experience, but it doesn’t have to be.
There are a few things someone with no credit can do to build credit quickly. Here are 6 strategies you can follow to help you to start improving your credit score.
Rate Search: Check Today’s Mortgage Rates
You can become an authorized user at any age for some Visa and MasterCard accounts. American Express and Discover require authorized users to be at least 15 years of age. If you have a relative or close friend that is willing to help, you can be added as an authorized user on their credit card account.
When you’re added as an authorized user on a credit account, that account’s entire history will appear on your credit report; you don’t even need to physically have a card. FICO does factor authorized users into their credit score algorithm. This can improve your credit score significantly in some cases.
Make the account you are being added onto is in good standing. If the account has any late payments or the balance maintained is close to the limit, it’s probably best to stay away. It could end up hurting your credit score if the account has any negative history.
You should trust the person’s financial responsibility. If the credit account is relatively new and the account owner has a history of making poor decisions, be careful. You are now on the hook if the account goes into a negative status or the account goes to collections. If either of these scenarios happen, you will see a significant negative impact on your scores.
2. Open a Secured Credit Card
A secured credit card is used just like a regular credit card. You will have to deposit the amount of credit offered to you. If the limit is $500, you will send in a $500 deposit. Once you have your card, you can use it to make purchases everywhere. Make the monthly payments and build your credit score over time.
Secured credit cards will build credit just like an unsecured credit card will. You will get the deposit back when you close the card. It’s good to keep it open until you build your credit up enough to qualify for unsecured credit accounts. There are several secured credit cards you can choose from Wallet Hub.
3. Find a co-signer
If you’re not able to get approved for credit on your own, someone may be willing to help you. A co-signer is also held responsible in the event the loan is defaulted on. This is the hardest thing for most people to do. The risk is often too high for someone who has built good credit over the years.
If someone is unwilling to co-sign for you, ask them to add you as an authorized user on one of their credit cards and tell them, you do not even want a card. This strategy comes with much less risk, and people are more willing to add an authorized user than co-sign for someone.
4. Have someone add you as an account owner
This is a strategy that works great but is not commonly used. If someone close to you is buying or leasing a car, have them add you onto the loan as the main borrower and add themselves as a co-signer. Because they own the car and will be making the payments. You are just on the loan to help build credit for yourself.
This is great for parents to help their children get a leg up in their financial life. It’s also great for married couples where one spouse has good credit, and the other is trying to improve their credit. Both spouses will need to have good credit to purchase a home, which is a great strategy.
5. Get a credit builder loan
A credit builder loan is offered to financially secure people who need help building their credit scores. They are offered in amounts ranging from $500 up to $2500. These are usually offered from the local credit union you bank with. If your checking account has been in good standing without any overdrafts and have steady employment, you can qualify for credit builder loans.
There are different ways banks configure a credit-builder loan. For a standard credit builder loan, the bank will set up a savings account to deposit the funds. You are restricted to the funds until the last payment has been made.
For example, a bank gives you a $1000 loan; it will be put into a restricted savings account. You pay monthly plus interest for 12-24 months, and when you make your last payment, you are given access to the savings account. The payments you make are reported to all three credit bureaus.
There are other ways banks can structure a credit builder loan. It could be secured by money you have in your savings account. You will need to keep at least the loan amount in savings until the loan is paid off. There are unsecured credit builder loans as well that require no collateral or restrict your use of the loaned funds.
Credit builder loans are a great way to help you establish credit or increase your credit score.
6. Get a student credit card with no credit check
Student credit cards are offered exclusively to college students with no credit history. There are many places online you can find student credit cards with no fees and low-interest rates. If you’re a college student, applying for a student credit card should be the first thing you do to start building credit.
How Your Credit Score is Calculated
How Your Credit Score is Calculated
Payment history is how well you pay your bills on time. This includes late payments and collection accounts.
The amount of available credit you're using is called your credit utilization ratio. Try to keep your credit utilization ratio below 25%.
Length of Credit
The longer your accounts stay open, the better your score will be. Don't close credit cards is possible.
Types of Credit
A mix of credit accounts such as credit cards, auto loans, mortgages will help improve your credit score.
Credit Inquiries & New Accounts
When a lenders pulls your credit it creates a hard inquiry. Multiple inquiries hurt your score count against you for 12 months.
How to continue to build credit scores
Once you have established some credit history and have a credit score, you need to have good habits.
- Check your credit scores and credit history often. Download the Credit Sesame and Credit Karma apps to track your score and get alerts for any activity on your credit report for free.
- Pay all of your bills on time. A single 30-day late payment can negatively affect your credit score by as much as 100 points. Your payment history accounts for 35% of your credit score. Payment history has the most influence over your credit scores.
- Keep your accounts open for as long as possible. The average age of your open accounts makes up 15% of your credit score.
- Keep credit card balances low. Your credit utilization ratio accounts for 30% of your credit score. The lower the balances are, the higher your credit score will be.
- Have a mix of credit account types. Your account mix makes up 10% of your credit score. Having various credit types, such as credit cards, installment loans, auto loans, etc., shows diversity in your credit profile, thus increasing your credit score.
Building Credit FAQ
How do you get credit?
To start establishing credit, you need to have a credit line open for 6 months. Once you have 6 months of credit history, you will have a FICO score.
How do you build credit enough to establish good credit?
To have good credit, you need to have a long history of paying your bills on time. Your payment history is 35% of your credit score. You will also need to maintain low balances on your credit card accounts. Your credit utilization ratio accounts for 30% of your credit score.
Does being an authorized user improve my credit score?
Yes. FICO does factor authorized users into their credit scoring algorithm. When you are added on as an authorized user, your report’s entire history will be added to your report. This can boost your credit score quite a bit in some cases and can build credit for consumers with no credit score.
How old does an authorized user need to be?
Some banks that offer Visa and MasterCard cards do not have a minimum age. American Express and Discover require an authorized user to be at least 15 years of age.