How to Build Credit When You Have None

Some young adults and others face the dilemma of not yet having any credit history. When these consumers seek credit, they often experience a “chicken and the egg” problem.

Here, lenders often hesitate to offer a loan or credit card because the borrower has no credit history. Luckily, having no credit history is usually preferable to having a bad credit history.

FICO and VantageScore are the two primary models that calculate credit scores. FICO typically begins calculating a credit score after you have had an active credit account for six months.

Yet, VantageScore calculations usually begin much sooner. Often, it is just one month after the accounts appear on your credit history.

Get a Secured Credit Card

One of the best ways for establishing credit is using a secured credit card. Credit cards are classified as revolving credit accounts. When using secured credit cards for purchases, they function the same as other types of credit cards.

Unlike unsecured credit cards, secured credit cards require a security deposit. The account’s opening credit limit is usually equal to the deposit amount; often, in the $200 to $500 range.

Use the card each month for purchases and repay the balance before the due date. After several months of responsible use, the cardholder often receives their deposit back.

Avoid “maxing out” these or other revolving credit accounts to avoid hindering your credit utilization rate. Try to keep the balance below 30% of the total limit.

Most card issuers eventually make card holders eligible for an unsecured credit card. Remember that failing to responsibly manage the account will generally worsen your credit.   

Many secured credit card accounts impose exorbitant expenses, interest rates, and annual fees. Thus, shop around for a card offering reasonable terms. 

Get a Credit Builder Loan

A credit builder loan is another viable option for building credit. Unlike traditional loans, you should qualify regardless of your prior credit history.

Credit-builder loans are often available through local banks, credit unions, and online lenders. With these loans, the “borrowed” funds are usually deposited and secured in a bank account.

Credit-builder loans usually have a term ranging from 12 to 36 months. The consumer makes fixed, monthly payments, and activity appears on your credit report. 

During the term of the loan, you should notice that your credit score increases. Credit-builder loans help improve several important factors that influence your credit score such as: 

• Developing a good payment history.
• Steadily increasing the length of your credit history.
• If used in conjunction with a secured credit card, this installment loan account improves your credit mix.

If possible, choose a lender who reports to all three credit bureaus: Equifax, Experian, and TransUnion. After completing the loan process, you will have access to the funds secured in the bank account.

Report Your Rent and Utility Bills

Consumers with a current home rental agreement can now consider rent reporting. The three major credit bureaus will now add monthly rent payments to your credit history. 

Introduced in 2014, the FICO 9 scoring model now includes rental payments in its credit calculations. VantageScore now also considers “non-traditional” information such as rent and utility bill payments.

Rent reporting companies have continued emerging in recent years. In 2010, Experian acquired RentBureau. This database now boasts of helping more than 26 million residents.

The Experian BOOST^TM program is a free option for reporting. Payment reporting options with Boost include rent, utilities, streaming services, and many more.

Experian says that roughly 75% of consumers who report rental payments enjoy a credit score increase of more than 11 points.

Many of the reporting services today also will report past rental payments. For example, Boom Pay will report the past 24 months of payments for an extra fee.

TransUnion estimates that 70% of consumers who report their rent notice an improvement in their credit score.

As a reminder, having late payments and other negative events will cripple your credit-building plans.

Student Loans Can Help Build Credit

Many young adults or others that lack any credit history may have student loans. With the high costs of higher education, student loans are common credit accounts.

Data shows that more than 43 million Americans have federally-funded student loans. The total value of these loans exceeds $1.7 trillion.

Often, those seeking student loans will get approval for financing regardless of their credit score. Student loans are an excellent way of building credit. Yet borrowers must show financial responsibility, as these loans will impact their credit history. 

Student loans are also usually a large financial responsibility. Reports suggest that the average borrower accrues more than $37,000 in student loan debt.

Student loans are types of installment loans. Since the COVID-19 pandemic, the federal government extended payment forbearance.

A forbearance halts the repayment requirements for borrowers. 

The repayment terms associated with student loans often vary. For example, consider the following three repayment plans:

• Standard: The plan usually has a set monthly repayment amount for as long as 10 years. According to the Department of Education, the minimum monthly payment is $50.
• Extended: The plan resembles the standard; yet, the loan term ranges from roughly 12 to 30 years.
• Graduated: Also referred to as a progressive schedule, graduated payments increase over time. For example, the payments are very low for the first two years but increase slightly every two years.
• Income-based: Income-contingent and income-sensitive repayment plans have terms extending up to 25 years. The monthly payment is variable based on the borrower’s income, amount of debt, and other factors. 

Make On-Time Payments Every Month

The most important single factor that influences your credit score is payment history. Your payment history is a variable that exists across all typ