This is the ultimate catch-22. Banks don’t want to give you credit unless you have a credit history. But how are you supposed to build a credit history when banks won’t give you credit to do so?!
Whether you’re 18 or 80, if you want to know how to build when you have no credit, then this guide is for you! If you’ve already been turned down for a credit card and don’t know what to try next, then try this.
Step One: Get a Secured Card
These are a different type of credit card. They require a security deposit – this guarantees the bank still gets paid even if you stop paying your bill. This deposit is fully refundable when you close your account.
Because there’s little to no risk for the card issuer, many secured credit cards have 100% guaranteed approval, assuming you meet the basic requirements like being 18 and above, a U.S. citizen, etc. For this reason they are a great way to build credit when you have no credit or bad credit.
These cards usually do have fees, which is why I don’t recommend using them for more than a year or so. To compare the best offers, check out this sponsored section featuring the best secured credit cards.
Step Two: Building Credit
Of course, after you get your card, you will want to work on building credit history with it. But how do you do that? Here a few tips for how to build good credit:
Don’t overuse your credit!
Many people that are building history find it ironic when I tell them to not use their credit too much. After all, isn’t the more we use it, the better? Well that’s a common misconception. Let me explain why…
The percentage of your credit card’s spending limit that you use is called the credit utilization rate (CUR for short). For example, if your credit limit was $1,000 and you were using $300 of that, then you would have a CUR of 30% for that account (300 ÷ 1,000 = 0.30 = 30%).
Ironically a high CUR is not a good thing and it will hurt your credit score! Generally, you want to keep your CUR below 30%. Keeping it below 25% would be even better. But keeping it a 0% would be a bad idea, because then your account looks like it’s not being used. So if you’re trying to build your credit try and keep your CUR below 30% and above 5% during any given month.
Always pay on time
If you want to know how to build credit when you have no credit history at all, I can’t stress enough how important it is to pay your bill on time, every time!
Because your credit history will be so short, everything you do will be more scrutinized. If someone has a 7 year credit history and only one late payment during that time, it won’t affect them that much. But how do you think it looks having a card for just a few months and already having a late payment on it? Not good!
Just make sure you do whatever it takes to pay on time. Online bill pay is highly recommended so there’s no change for a bill to be lost in the mail or taking a long time to arrive.
Step Three: Try For Something Better
After you have been building credit history for a while with your secured card, you will want to try getting something better… an unsecured card.
So how long should you wait until you try and apply for an unsecured card? Well, every situation is different so there is no universal answer, but I would probably recommend trying it at 6 to 9 months but it may take longer than that.
Now here’s where it gets tricky. Did you know that every time you apply for unsecured credit (whether it’s a credit card, loan, or even a new cell phone account) an inquiry on your credit file is made… and each time that’s done, it may temporarily knock down your score by a few points?
For this reason, it’s a bad idea to apply for unsecured credit cards frequently. So keep that in mind when it comes time for you to try and apply for one (meaning if you get rejected, don’t just keep repeatedly applying for other cards!). I would probably advise against more than four card applications during a 12 month period. Note: Most secured cards don’t do a credit check so this information wouldn’t apply to them.
Well, now you know how to build credit even when you have absolutely no credit to begin with! You can check out secured credit card offers here catered to your exact needs.