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How to Start and Build Credit without Credit History

Building a good credit history is one of the most important steps you can take because it figures into many financial decisions that companies make about you.

Your credit history qualifies you for loan, employment, insurance policies, and credit cards. Lack of credit records will cause you to be turned down or pay higher rates.

If you never applied for a loan or any type of credit, you’ll need to become familiar with the terms of financial terminology:

Credit Score

A credit score is a three digit number anywhere from 300 to 850. The higher the number, the better your credit rating. Generally, your payment history, the type of credit used, the amount owed, and length of credit history are used to determine your credit score.

Debit Cards

Debit cards are linked to your checking or saving account. You can only spend what is available in your checking account. Debit cards have no effect on your credit score and using it doesn’t build your credit score.

Credit Cards

Credit cards give you a set limit that you can spend and has direct effect on your credit score. A credit card is a payment tool accepted at over 30 million locations worldwide that provides access to unsecured credit during any time of day or night. If the card balance is paid off every month, then no interest is charged on purchases made from the time of purchase to the end of billing period. Here are other advantages:

  • It is more convenient to carry than cash.
  • Offers free use of funds when your balance is paid in full and on time.
  • Provide a convenient 24/7 access.
  • Help you establish a good credit history when used correctly.

Some credit cards provide you with incentives, such as reward point. If you don’t use credit cards wisely, you can build up more debt that you can handle. If you pay your payment late, it will damage your credit rating.

You need to learn to handle credit cards wisely in order to take advantage of unsecured loan, and build your credit score rather than damage it. You have to be good in budgeting and managing your finances, and to make sure you can pay back on time what you borrow.

Remember that if you make only the minimum monthly payment you may never get out of credit card debt. In addition, if you take cash advance on your credit card, the interest starts accumulating immediately and not on the due date of your credit card bill. You also have to pay certain percentage based on the type of credit card on the total amount of your cash advance.

When you’re ready to apply for credit card, shop around for the one without an annual fee, low rate, and with incentive such as 2% reward point that you can redeem. Get in the habit of only charging to your cards what you can pay off in full when the bill comes.

Here are others information you need to understand about credit cards:

  • Credit Limits – The credit limit is the maximum amount set by the issuer allowing you to charge.
  • Interest rates – This is the percentage set by your credit company. If you do not pay your monthly balance in full, you won’t be charged the interest rate.
  • Minimum payment – This is the minimum amount from your balance you must pay each month. You should try to pay the full balance or at least over the minimum amount to pay your debt in shortest period of time in order to avoid keep paying the interest rate.
  • Due date – This is the specific set date that you must pay a minimum balance or pay the full amount to avoid paying interest rate. Building a good credit history takes time. You can start building a positive credit record by some careful planning.

Open Checking and Saving Accounts

Your first step should be to open at least one bank or credit union account in order to pay your bills and to make you look responsible to lenders.

Student Credit Card

Some major credit card companies offer credit card to students with part-time or summer jobs. You have to prove that you have enough income without a co-signer if you are under age 21. The card typically comes with higher than average interest rates and under $1,000 credit limit. However, it’s a good start in building credit history.

Get a Secured Credit Card

Some banks offer secured credit cards to those who open an account and agree to keep a specific amount on deposit. You can stop by your bank or shop around online for a secured card with a low annual fee. Make sure they report to all three credit bureaus.

A secured card is backed by a cash deposit that’s equal or higher than your credit limit. Your cash deposit is used as collateral. You begin to use it just like a credit card and make a payment before the due date to avoid paying interest fee.

Your main purpose of getting a secured card is to build your credit for six months and up to a year to qualify for an unsecured card. You’ll free your cash deposit as soon as you apply and get approved for an unsecured card and then close your account for your secured card.

Get Credit Card from a Department Store

Department stores are more lenient in approving accounts for people with little or no credit history. They report transactions to the credit bureaus. Try to use the cards to build up your record.

Pick your favorite store that you usually shop at and apply for a charge card. You can only use store charge card at the store you applied for. The credit limit will be low and interest rate will be high. Use your charge card and pay it off in full to avoid paying interest fee. Your purpose is to establish a payment history.

Become an Authorized User

You may want to ask a close friend or a family member with established credit to add you as an authorized user on his or her card. You don’t have to qualify with the bank.

When you become an authorized user, you will have access to a credit card, but you are not legally responsible for the debt. However, you should feel responsible and pay whatever you charge on that card.

Some card issuers report an authorized user to credit bureaus. You can start charging and pay your debt on time. You will be able to build credit history and hopefully apply for credit card in your own name from the same card issuers after a few months of positive activities.

Use a Co-Signer

Some banks or credit union allow co-signers on credit cards issued in your own name. You can ask a relative to co-sign for you. Both you and the co-signer will be responsible for the debt.

Be sure to use the card every month and make your payments on time in order to build credit history. Late payments will damage your credit and your co-signer’s.

Get an Auto Loan

If you have some credit history, you may be able to get an auto loan through your bank or credit union. Without a credit history, you can get a loan through the dealer. If you cannot get a loan through the dealer, ask a relative to co-sign. An auto loan allows you to build positive credit history as long as you pay your monthly debt on time.

Apply for a Credit Card

Once you have some positive credit history, apply for a Visa or MasterCard. Apply for only one card within every six months period. All you need 2-3 credit cards to build positive credit history and to increase your credit score. Try to get a card with rewards for using the card.

Here are some tips to follow:

  • Use your card and pay monthly bills on time.
  • Try to pay the full balance whenever you can. You’re showing the credit card company that you are a responsible borrower capable of paying the full balance on time. When you pay your entire balance on time you will not be charged interest fees.
  • Keep your balances low. Keeping balances close to your credit limit reduces your credit score. Never max out your credit card account.
  • Don’t apply and open more accounts than you need. Too many credit inquiries will damage your credit.
  • Don’t move debt from one credit card to another. The best practice is to pay it off.
  • Don’t close credit card account if you don’t plan to use it in the future. Closing accounts increases your ratio of debt to available credit and can lower your credit score.
  • Be careful whenever you plan to use your credit card. Don’t charge what you cannot pay when the bill comes.

Remember that building an excellent credit history takes time. You should beware of how to use credit responsibly. Hopefully, you’ll be able to build positive credit history.

There are times that credit card issuers increase your credit limit. This is a good sign indicating your credit rating has increased as well.

Make sure to request free credit reports through annualcreditreport.com once a year. Your credit only counts if the lenders are reporting your accounts to major three credit bureaus.

Once you get your report from Equifax, Experian, and TransUnion, compare the three and look for any mistake. If any of your loan or credit card account doesn’t appear on the report, call the company and request that it start reporting your account activities.

By William Robinson – 2019
Copyright © 2019 Allied Publishing
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Allied Publishing

For additional articles written by William Robinson, see alliedpublishing.com/building-your-credit. William Robinson is the author of How to Build Better Credit Rating published in 2019.