How to Establish Credit with No Credit History

Credit impacts many areas of our lives. Not only can you expect a credit check when applying for a loan or credit card, but also when filling out an application to rent an apartment. Sometimes, even potential employers check your credit as part of their hiring process!

For people with no credit history, the prospect of building credit can feel like a chicken-or-the-egg situation. You need an established credit history to get credit, but how do you build a credit history without first getting approved for credit? Let’s discuss!

What is credit history?

Your credit history is a record of your financial behavior over the past seven years. Essentially, it’s what appears in your credit report.

Credit history shows information like the number of open or closed accounts you’ve had, how long you’ve had each account, whether you made on-time payments, if you paid off balances, and how much you still owe on your accounts.

How to build credit history

You build a credit history by getting credit and using it wisely. The basic steps for building credit are as follows:

1. Open a credit account, like a loan or credit card.
2. Make your payments on time.
3. Keep balances low and pay off the debt as quickly as you can.
4. Check your credit report regularly (at least once a year).
5. Follow best practices to show responsible credit behavior.

How lenders utilize credit history

Lenders are interested in your credit history because it tells them what kind of lending risk you are. They can see what your previous lenders have to say about their experiences with you. In many cases, new lenders will make their approval decisions based on what your credit history says about you as a borrower.

In other words, your credit history is your financial reputation- and we all know reputation matters!

Why is having a credit history so important?

Your credit history influences how others make decisions that affect your life. The more financial credibility you have, the higher your chances of getting favorable decisions when you want to purchase a car, make a career change, move to a new apartment, or buy a house.

Lenders also use your credit history to decide whether to approve you for emergency loans. Having an established credit history can make it easier to get the money you need for costly medical procedures, emergency vet bills, and other unexpected expenses.

I don’t need to borrow money, so why do I need good credit?

Good credit comes in handy for situations besides getting approved for financing.

For example, when you sign up for a new mobile carrier, they’ll often check your credit to determine whether to charge a down payment. If you haven’t built up a credit history, you may owe a lot of money upfront just to get the service activated.

Imagine you move to a new city for work. Even if you plan to buy a home there, you’ll probably have to rent at first. Good credit shows potential rental companies or landlords that you’ll pay your rent on time and in full each month.

What if you apply for a great job that carries a high risk of theft or fraud? A good credit history tells an employer you’re a low-risk hire they won’t have to worry about, which makes them feel confident about making you an offer.

How do I establish credit with no credit history?

To establish credit with no credit history, you’ll need to do everything you can to demonstrate responsible financial behavior. Once approved for a credit product, use it wisely. This means paying down balances and always making payments on time.

But traditional loans and credit cards are only one credit-building strategy. Here are some alternatives that can help you build credit:

1. Apply for a secured credit card

A secured credit card requires you to pay a cash security deposit to open the account. This deposit reduces the lender’s risk because they can keep your deposit if you don’t pay off your balance. The credit limit for a secured credit card depends on the deposit amount and typically ranges from $250 to $5,000.

Using a secured credit card responsibly can improve your credit score and eventually help you qualify for an unsecured credit card. The best practices for building credit with a secured credit card are to:

• Use it sparingly.
• Make small purchases every month.
• Keep the balance under 30% of the credit limit.
• Pay the balance in full before each due date.

Secured credit cards can be good options for borrowers with fair or poor credit since many lenders have more lenient approval requirements.

2. Apply for a student credit card

Lenders understand most college students haven’t had time to build a credit history yet. That’s why they created student loan credit cards that don’t require a credit history and can be used to build the credit you’ll need once you’re done with school.

3. Apply for a credit-builder loan

A credit-builder loan operates in reverse of a traditional loan. With a credit-builder loan:

• Your loan funds are held in a lender account.
• You make all your loan payments first.
• You get access to the funds after making your final payment.

You might wonder “What’s the point of paying back a loan before you get the loan money?” Each time you make a loan payment on time, the lender tells the credit bureaus about it. When you make the final payment, you’ve established a positive payment history for your credit-builder loan.

It sounds backward at first, but this can be effective for establishing a credit history. Remember – it’s about building credit, not when you get the payout.

4. Apply for a retail store card

Are you a loyal customer at a specific retailer? If so, see if they offer a store credit card. These can be easier to qualify for and can help you build credit by making payments on time and keeping the balance low.

5. Become an authorized user

To do this, you’ll need someone with good credit who is willing to add you as an authorized user on their account. An authorized user can “piggyback” off the account holder’s good credit history. However, the account holder puts their credit at risk if the authorized user abuses the situation.

If someone agrees to add you as an authorized user on their account, make decisions that won’t negatively impact their credit. After all, they’re helping you!

6. Get credit for some of your monthly bills

If you’ve had no luck getting approved for the loans or credit cards we’ve mentioned, there are still ways to build credit. In fact, you may already be doing them but not getting credit, and that’s paying your monthly rent and utility bills.

Since most landlords and utility companies don’t report on-time payments to the credit bureaus, consider using a third-party service that lets you manually report your payments. You might even ask your landlord if they’re willing to utilize a service that allows them to report your rent payments.

While these aren’t payments on actual credit accounts, they can show a pattern of being responsible and making payments on time, which establishes a good financial reputation.

Start establishing credit with no credit history

Without a credit history, you’re more likely to face housing barriers, be disqualified for certain jobs, or face setbacks due to financial emergencies. Remember, everyone has to start somewhere, so why not start building your credit today?

In the meantime, if you need to borrow money with no credit history, Advance America can help. Visit us in-store or apply online now to get the money you need.