How to Build Credit Starting with None

Published Date 6/9/2017

In today’s world, having credit—especially major credit cards—is nearly a necessity. Credit cards make paying for almost everything more convenient and safer. In those rare instances where someone charged your card fraudulently, or when a merchant didn’t deliver what they’d promised, one call to the credit card company can resolve the problem.

For people who have never established credit, however, the age-old “catch-22” comes up: you don’t have a credit history because you have no credit cards or other loans. You can’t get a credit card or other loans because you have no credit. Here is how to begin establishing credit when you have none.

If you can’t get approved for a credit card because you have no credit history, go to your credit union and ask for a secured card. Making a deposit of $500 will get you a card with a limit of around $300. You should be sure to tie the card to a bank account so you can pay it off regularly and conveniently. You should also arrange for an automatic payment of the minimum to eliminate the possibility of a late payment due to an oversight.

When you apply for the card, make sure they report to all three bureaus—Equifax, Experian and TransUnion.

Now, begin using the card often. You should not spend money that you would not otherwise have spent; use it for gas and groceries, for example. You should think of your credit card as a convenience and a way to build a credit history—not as a license to spend. By paying the balance in full each month, you’ll never pay a penny of interest.

After six months or so of on-time payments, the credit union will probably release your securing deposit. Now you’ll have an unsecured card. Over time, you can expect them to raise your credit limit regularly.

Did I mention that you should pay the card in full each month so you don’t pay any interest? Good. Just checking.

Once you have had your secured card for a couple of months, apply for another one. Department store cards tend to be quite easy to get, and many offer discounts to card holders. The Amazon card offers a 5% rebate on most purchases from Amazon, for example.

What you should not do is fall for any of the credit card offers in the mail that promise you, “You’re already approved!” Many of these predatory companies charge an “application fee” of $300 or more—conveniently charged to your new credit card, which has a credit line of $500.

A word about credit scores: one component of the FICO scoring model is the age of accounts. A 10-year-old account in good standing can add dozens of points to your score. It is unlikely that you have a FICO score at this point, but once you have a card, you’ll begin to show up in the credit bureaus’ databases. The more “seasoned” your accounts are, the more they will enhance your score.

Keep an eye on your balances. Once the outstanding balance of a credit card goes over 30% of its credit limit, your score will start to suffer.

With your first two revolving accounts in good standing, you will find getting approved for more accounts to be increasingly easy. Look for cards that provide extra benefits: cash rebates, airline miles, and extended warranties are commonplace and worthwhile. Stay away from credit cards that impose any application or annual “renewal” fees; there is no reason for you to pay them when there are so many attractive cards available with no fees.

One word of caution: as you build your credit history, the credit card companies will increase your credit line. This is a good thing, but it can be a trap. They are really trying to entice you into carrying a balance each month so they can collect their high rate of interest. Don’t fall for it! While credit cards are useful and convenient, they are an expensive way to borrow money. Paying your accounts in full each month can save you tens of thousands of dollars.

Having a good credit record will enable you to get the best rates for other types of financing. Mortgage rates and other types of consumer financing like car loans and leases are tied to borrowers’ credit scores, so a high credit score can save you hundreds of dollars each month when you have a mortgage or car loan.

If you follow these simple steps, you’ll be on the way to building a good credit record—and enjoying the financial benefits of a high credit score.

Source: TBWS