How to Build Credit When You Have None

How to Build Credit When You Have None

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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 BOOSTTM 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 types of credit accounts.  

Making the minimum required payment before the due date is a fundamental key. Having a poor payment history can even impact you with accounts for services that are not credit-based.

For example, if you fell behind on your electric bill and accumulated a large debt. Here, a utility provider might forward the debt to a collection agency. Soon, the collection account will appear on your credit history as an adverse entry. 

Both FICO 8 and VantageScore treat your payment history as a key factor. In calculating credit scores, FICO considers payment history as 35% of your overall credit score.

VantageScore’s 9 model now increases the influence that payment history has even further. The VantageScore model may consider payment history as 41% of your score. 

Payment history demonstrates your ability to make timely payments over a period. Remember that most late payments will not appear as credit report entries until they are 30 days late.

In today’s technological environment, accidentally missing payment due dates is avoidable. Mobile devices may run a variety of applications that generate reminders.

Further, most of the companies you have accounts with have “autopay” options. This simply ensures that your payment transmission occurs each month electronically. The payment goes automatically from your checking account before the due date.  

Keep Credit Utilization Under Check

The second most important factor influencing your FICO credit score is your amount of debt. Of the five basic components, your amount of debt has 30% of an influence on your credit score.   

First, amounts owed consider how much total debt you have. While high debt levels may be problematic, they are less influential when managed responsibly.  

Of even greater importance is your credit utilization rate. Lenders view consumers using the majority of their available credit as a risk.  

This is one reason why “maxing out” credit card accounts is often discouraged. For example, someone with a balance of $4,900 on a credit card with a $5,000 limit is often viewed as “overextended.” Here, the cardholder is using roughly 98% of the available account balance.

The basic formula for calculating your credit utilization rate is as follows:  

CUR = The total (sum) of all credit card balances / The total credit limit (sum) across all credit card accounts

Remember the importance that your credit limits play in your credit utilization rate. For example, closing an active credit card account with a $5,000 limit may have a detrimental impact although the balance was zero.  

The credit scoring models generally consider utilization rates of less than 10% as optimal.    

Limit Hard Inquiries on Your Credit Report    

Lenders perform a credit check on consumers who apply for loans, credit cards, and such. Before conducting a credit check, the prospective lender will ask you for permission.  

Each time someone checks your credit score a “hard credit inquiry” occurs. The process is also sometimes called a “hard credit pull.”  

There is a section of your credit history that lists such inquiries. Having a couple of inquiries over a multi-year period is the norm. 

In some instances, a consumer might abruptly apply for multiple credit accounts in a span of a week or month. Here, the number of credit inquiries is potentially concerning to a possible lender.

Credit scoring models may interpret several hard inquiries as a sign of unexpected financial problems. Hard inquiries also usually trigger a small, temporary drop in your credit score. 

While the entry remains visible for two years, FICO now only considers those from the past 12 months.     

In some cases, consumers are preparing to finance a large purchase such as using a home mortgage. Here you might “shop around” among three or more lenders to compare rates.  

In these situations, the credit scoring models recognize this activity. Using this example, your credit report would show only a single, consolidated hard inquiry.

Be Aware of Identity Theft

In today’s digital environment, a common form of criminal activity is identity theft. Here, the perpetrator gets a consumer’s personal information and commits fraudulent activity.

Those who commit this type of fraud often use new, creative methods. Thus, many of these crimes often go undetected for a while.

Each year, U.S. consumers may obtain a free copy of their credit report. You can view the report and check for any inconsistencies that don’t look right.

You can also keep a close eye on your credit score through apps like Experian, Capital One, and others. This represents an opportunity to check credit scores for errors and signs of fraud.

You should closely assess the entries with your credit history for any irregularities. 

Consumers without a credit history have a host of options for establishing one. Credit, particularly good credit, is important for a variety of reasons. Your credit score might impact your ability to rent an apartment, get a job, and even affect your car insurance rates.Consumers can usually achieve an average credit score in less than one year. Yet, achieving a score of 800+ will require a bit more time.

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