How to Build Credit with No Credit History

Developing a credit profile might sound quite challenging, however it is an important step in gaining financial independence. Credit scores are essential with people providing financial services such as car loans, mortgage, credit cards, and even employment services using the scores in rating your credit worthiness. 

If you don’t have any credit, you are viewed as a new page and applying for loans, credit cards, even renting a house, becomes almost impossible. But if you approach it properly and wait for some time you’ll be able to build a good credit history and open the door to favorable financial offers. Here in this guide, we will outline what you need to do in order to build credit for the first time and set you up right from the start.

Why Building Credit Is Important

Before we head to the steps it is imperative to know why credit building is important. Credit is like the key to your financial situation, and you will find credit touches nearly every part of your financial lives. In life, one must need a loan, a house or apartment, a new cell phone plan; the credit score comes in handy. 

By having a good credit rating one can be able to have a smaller interest rate which may save him/her tens of thousands, increase his/her credit limit and be able to access better financial products. On the flip side, you have no credit or bad credit score which leaves you with high rates, deposits or rejection. Establishing credit early makes for an individual to develop a sound financial future, as well as be more flexible when it comes to undertaking major life events.

Simple Steps to Build Credit with No Credit History

If you are a new credit user and have no credit history, then you have no credit score too, and you should follow these basic guidelines to construct credit.

You are not alone–there are actually several simple ways to get credit started if you have none at all. Here are the essential steps to get started:

1. Start with a Secured Credit Card

When it comes to credit building, getting a secured credit card is one of the simplest ways that one can embark upon. A secured credit card is very similar to an ordinary credit card, but when you apply for it, you are asked to provide a refundable security deposit in the amount of the credit limit. For instance, you can commence with a $300 deposit and you shall be issued a credit limit of only $300 as well. This helps to ensure that for the credit card issuer, the good amount of credit risk is minimized or eliminated and enables many people who do not have a credit history to get approved for the credit card.

Here’s how a secured credit card works:

• Builds Payment History: By using the card regularly and paying off the balance in full each month, you build a consistent payment history. Payment history is the most critical factor in your credit score, making up 35% of your total score.
• Transition to an Unsecured Card: Over time, as you demonstrate responsible credit use, many issuers will upgrade your secured card to an unsecured one and refund your deposit. This is a significant milestone in your credit-building journey.
• Low Barrier to Entry: Since the card is secured by your deposit, approval rates are high, even for those with no credit history.

For a list of recommended secured credit cards, check out NerdWallet’s guide to the best secured credit cards.

2. Become an Authorized User on Someone Else’s Card

Another efficient measure of establishing credit is engaging as an authorized user of another person’s credit card. Owning to the fact that credit scores are assigned to individuals, you can request a family member or friend with a good credit rating allow you to be authorized to use their credit card. When you become an authorized user, the card can be used and the positive payment history of the primary cardholder will be reflected on your credit report.

Benefits of Being an Authorized User:

• Instant Credit History Boost: Since the account’s history is added to your credit report, you can see an immediate improvement in your credit profile.
• No Payment Responsibility: Although you’ll be listed on the account, the primary cardholder is legally responsible for the payments. However, it’s crucial to only become an authorized user with someone who manages their credit well, as any late payments or high balances could negatively impact your credit.
• Build Credit Without Risk: This strategy allows you to benefit from the positive credit activity of others without taking on much risk yourself.

This method is particularly beneficial for young adults or students who are just starting to build credit. It provides a way to establish credit with minimal financial commitment.

3. Consider Credit-Builder Loans

Credit-builder loans are specially marketed as loans that can help customers without credit history to build credit. Credit-builder loans are not like standard loans, where you borrow the money and pay it back gradually; instead, they operate in a different way. The loan amount is kept in a secured savings account and you are expected to make agreed-installments for an agreed time span. Upon the final payment of the loan you are returned this principal amount, as well as any interest accumulated. The biggest advantage is that such payments show up on credit reports and therefore you start to build credit history.

Why Credit-Builder Loans Are Effective:

• Reports to Credit Bureaus: Consistent, on-time payments are reported to the major credit bureaus, which boosts your credit score.
• No Upfront Lump Sum Required: Since the lender holds the funds until the loan is repaid, there’s no large upfront payment needed, making it accessible for beginners.
• Establishes a Positive Payment History: Regular payments show that you can manage debt responsibly, which is a key component of building credit.

Credit-builder loans are usually offered by credit unions, community banks, and some online lenders. They are an excellent option for those who want to establish credit without taking on significant financial risk.

4. Use a Co-Signer for a Traditional Loan

If you’re unable to qualify for a loan on your own, another option is to use a co-signer. A co-signer is someone with good credit who agrees to take responsibility for the loan if you default. Having a co-signer reduces the lender’s risk, making it easier for you to qualify for loans or credit cards that would otherwise be out of reach.

Benefits of Using a Co-Signer:

• Access to Better Loan Terms: With a co-signer, you may qualify for loans with lower interest rates and better terms, which can help you save money while building credit.
• Shared Responsibility: The co-signer’s good credit helps offset your lack of credit history, allowing you to benefit from more favorable lending conditions.

However, keep in mind that this approach comes with risks. If you miss payments or default on the loan, it will negatively impact both your credit and the co-signer’s credit. Therefore, it’s crucial to only use this method if you’re confident you can manage the payments responsibly.

5. Pay Your Bills on Time to Establish a Payment History

Even if you don’t have a traditional credit account, paying your bills on time is a critical step in building credit. While things like rent, utilities, and phone bills aren’t always reported to the credit bureaus, services like Experian Boost allow you to include these payments in your credit report, helping you build a positive payment history.

Key Tips for Building Payment History:

• Set Up Automatic Payments: Automating your payments ensures that you never miss a due date, helping you maintain a flawless payment history.
• Track Your Payment Dates: Keep track of when your bills are due and pay them in advance whenever possible.
• Use Experian Boost: This free tool allows you to report non-traditional payments, like phone and utility bills, to the credit bureaus, giving your credit score an extra boost.

6. Monitor Your Credit Regularly

Tracking your credit is crucial to ensure your efforts are working and to catch any errors that could negatively impact your score. Many free tools and apps, like Credit Karma and Credit Sesame, allow you to monitor your credit without any cost. Regular monitoring also helps you spot any fraudulent activity early.

Why Regular Credit Monitoring Is Important:

• Catch Errors Early: Mistakes on your credit report, such as incorrect account information or payment errors, can drag down your score. Monitoring your credit allows you to spot these issues quickly and dispute them.
• Track Your Progress: Seeing your credit score improve over time can be motivating and help you stay on track with your financial goals.
• Prevent Identity Theft: Regular monitoring can alert you to suspicious activity, like unauthorized accounts or credit inquiries, helping you prevent identity theft.

For more information on credit monitoring, visit Credit Karma’s guide to monitoring your credit.

How Long Does It Take to Build Credit?

Building credit takes time, and while there’s no quick fix, you can see noticeable improvements within six months to a year if you follow these steps consistently. Several factors influence how quickly your credit score improves, including:

• Payment History: Consistently paying your bills on time is the most crucial factor in determining your credit score.
• Credit Utilization: Keeping your credit card balances low relative to your credit limit (ideally under 30%) is key.
• Mix of Credit Accounts: Having a diverse mix of credit accounts, such as a credit card, a loan, and a store credit account, can help boost your score.
• Length of Credit History: The longer your accounts have been active, the better. However, since you’re starting from scratch, patience is essential.

It typically takes about six months of credit activity before a credit score is calculated. During this period, focus on making all your payments on time, keeping balances low, and avoiding opening too many new accounts. With persistence and responsible credit habits, you can build a solid credit foundation that will serve you well in the future.

How to Check Your Credit Score for Free

Several platforms allow you to check your credit score for free without affecting your credit. Some of the best-known tools include:

• Credit Karma: Provides free access to your VantageScore from TransUnion and Equifax, along with credit monitoring and insights on how to improve your score.
• Credit Sesame: Offers free credit score tracking and financial advice based on your credit profile.
• AnnualCreditReport.com: Offers free access to your full credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once per year, as mandated by federal law.

Monitoring your score regularly helps you understand how your actions are impacting your credit, allowing you to adjust your strategies as needed.

FAQs

Q: Can I build credit without using a credit card?
A: Yes, you can build credit without a credit card by using options like credit-builder loans, reporting rent payments, or paying utility bills through services like Experian Boost.

Q: How long does it take to build a good credit score?
A: It generally takes six months to a year of consistent, positive behavior to start building a noticeable credit history. A “good” credit score (typically 670 or higher) may take longer depending on your financial habits.

Q: What’s the difference between a credit score and a credit report?
A: A credit report is a detailed record of your credit history, including accounts, balances, and payment history. A credit score is a numerical value derived from the information in your credit report and represents your overall creditworthiness.