If you’ve been following Club Thrifty for any length of time, you might think Holly and Greg don’t take much stock in credit scores. To an extent, you are correct. They don’t worry about their credit because they already have incredibly impressive scores; a ding here or there won’t make a difference.
But what happens if you have no credit? How can you build your credit when getting a credit card or loan are dependent on having good credit? Can anyone break out of this vicious cycle?
Well, don’t fret, my friend! The answer is an absolute YES. Just follow these 8 steps and you will be on your way to healthy credit in no time.
8 Ways to Build Credit
Check Your Credit Score
If you want to improve, you need to know your current score. While the Federal Trade Commission requires each of the three national credit reporting agencies – Experian, Equifax, and TransUnion – to supply you with an annual credit report, these reports don’t provide your actual credit score. While there are about a bajillion (yes, that’s a real number) ways to get your score, we prefer Credit Sesame.
Credit Sesame is free and signing up is easy. You’ll also receive free monitoring and alerts whenever something changes. With that being said, the free version only monitors your TransUnion credit report. Credit Sesame also offers a premium option that monitors reports from all three credit bureaus. Plus, it monitors your social security number, public records, and black market websites. Learn more here!
Free credit scores are great, but they aren’t the “real” number banks use to make lending decisions. To do that, you’ll need to check your FICO score through MyFico. For $29.95 a month, you’ll have access to identity theft monitoring plus monitoring all three of your credit bureau reports. You also receive a copy of all three reports each quarter. Learn more here!
Get a Co-Signer or Become an Authorized User
When I was 17, soon after I got my license, my dear ol’ mom and pop co-signed on a gas card for me. This simple, small step helped set me on my way to the impeccable credit I now have at 32. And guess what? You don’t have to be a teenager to go this route. If you have a trusted friend or relative with excellent credit, you may want to look into becoming an authorized user or having them co-sign.
So what’s the difference between these two options? Well, when you become an authorized user on someone’s credit card, you can potentially gain years of positive credit history without being legally responsible for the debt. You do not need to receive a card of your own, so the account holder does not have to worry about you racking up debt under their account. That being said, you are taking a risk when going this route. Credit bureaus treat these cards as if they were your own, so if the card owner misses a payment or they accumulate large credit card utilization, this goes on your credit report. Plus, depending on the scoring model used, your score may not be boosted at all. Lame sauce.
Co-signing, on the other hand, is when a person with good credit agrees to become a joint owner on your loan or credit card. This is potentially a risky situation for the co-signer because your behavior – like missing a payment or defaulting on the loan – will negatively affect their credit. Not to mention, screwing up on your loan can seriously put a damper on your relationship.
If you choose to go with either or both of these options, I highly recommend either removing your co-signer or yourself from the loan/credit card as soon as your credit has improved.
Get a Secured Credit Card
Another great way to help build your credit when you have none is to open up a secured credit card. A secured credit card is similar to a debit card, but instead of your funds being tied to your checking account, you put a deposit on your card. Your spending will then be limited to either the size of your deposit or a percentage of that amount.
Deposits can range from $200-$2000 and will be placed into a savings account, money market, or certificate of deposit, of which you will accumulate normal interest. Once you close your card account, your deposit will be returned, usually within a couple billing cycles.
Remember, not paying your balance on time will negatively affect your credit, so take the responsibility of having a secured card as seriously as if it was unsecured. Having a deposit does not mean you can skimp on paying your monthly bill.
Apply for a Store Credit Card
Unlike typical credit cards, store credit cards are usually easier to get approved for, and you may qualify for one – even with no credit history. My favorite store card is the Target REDcard, as you earn 5% off on each of your purchases, plus you get free shipping when shopping online. Keep in mind, though, that the interest rate on these cards are usually ridiculously high, which is just another reason to pay it off each month. Also, for the love of Pete and his dragon, do not use the card to purchase items you do not need. Just because you’re trying to improve your credit score does not mean you should go and purchase a 55″ flat screen. Do not use it as an excuse to spend!
Pay Your Bills On-Time and In-Full
While it may seem like a no-brainer, too many people conveniently forget that the number one way to negatively impact your credit score is paying your bills late. But seriously, folks, why the heck would a company want to give you credit if you can’t even pay your rent or secured card on time? Risky behavior like this is how you go from no credit to bad credit…and it can happen FAST!
In addition, paying your cards on time is not just a smart decision for your financial well-being, it also shows the credit bureaus that you are responsible and make enough money to cover your spending. If you can’t pay the balance each month then you are spending too much. Simple as that.
Send a Letter to Request Addition of Information Showing Stability
If you have been consistently paying your rent, utilities, and insurance on-time and in-full, you can request that the credit bureaus add this history to your report. It is a bit of a crap shoot if they will. but it’s absolutely worth giving it a try. You can find a free form letter and instructions here, and be sure to include copies of your bills, showing that you have paid them in-full each month.
Check Your Credit Score (Yes, Again)
You will need to periodically check your credit score to make sure you are actually making progress at building your credit. Plus, monitoring your credit score also helps you see if there are any discrepancies or incorrect records. The sooner you notice these, the easier they are to remove.
Apply for an Unsecured Card
Once your credit score reaches 650, or after one year of diligently working at your credit, try applying for an unsecured card. Keep in mind that you won’t have the best card choices right away, and you may have to pay an annual fee or a larger interest rate. But if you continue paying off the balance each month (and you stay on top of your other bills), you will get access to better and better cards. Eventually you will be able to purchase a home or apply for a rewards card.
While it may seem like an insurmountable task, building new credit is infinitely easier than trying to rebuild your credit after some bad financial decisions. Keep that in mind when you see friends throwing away money and racking up huge credit card bills. You are already ahead of them. Keep on trucking and you will get there. I promise.