When you don’t have a credit history, it can be difficult and frustrating when you try to get a credit card or other type of loan. However, establishing your initial credit history can be a catch-22. If you don’t have credit, not many places are willing to give you credit, but how can you ever establish credit if nobody is willing to give you any? It's frustrating but fortunately, there are some things you can do to establish credit as a beginner.
Understand What Lenders Are Looking For
Lenders use credit scores, including your FICO score, to gauge how responsible you are at using credit. These credit scores are based on things like your payment history, how much of your available credit you're using, the average age of your credit accounts, the types of credit you're using and how often you apply for new credit. FICO credit scores operate on a range from 300 to 850, with 850 being the highest score possible. 1
Since you are looking to establish credit for the first time, lenders can’t look to your FICO score to determine whether or not to lend you money since you may have no credit score at all yet. In these situations, they have to examine other factors that can help them decide if you are a credit risk or not. For instance, that includes:
- Bank accounts: You don’t need a credit score to open a checking account at your bank. Since it doesn’t require credit to open, it also doesn’t get reported to the credit bureaus to establish any credit. Even so, your account history can be a vital component when lenders consider giving you a credit card or loan for the first time.
- Employment history: Another important factor lenders look at is your employment history. They want to see if you are able to hold a job or if there are periods of unemployment. Your ability to hold a steady job can improve the likelihood of getting approved.
- Residence history: Lenders will also look to see how often you move and whether you rent or own. As with employment history, it pays to have a stable residence. Owning a home, even if just jointly with a spouse, carries some weight as well.
- Utilities in your name: Even without a credit history, it is possible to sign up for many utilities in your own name. Having an electric or gas bill, telephone, cable or water service in your name also helps. Just having your name on these accounts won’t establish a credit score, but it can be helpful for first-time borrowers.
- Rental history: If you rent vs. owning a home, your rental history could work in your favor for credit approval if you have a track record of paying your rent on time each month. There are some agencies that can help you build your credit through rent reporting, although this may affect your VantageScore, not your FICO score.
VantageScore credit scores are not identical to FICO scores and use a different set of criteria for determining your credit health.
Start With Your Bank
There are a few things you can do to boost your chances of establishing credit. The first thing is to open and maintain a checking and possibly even a savings account at a bank. This is helpful in two ways.
First, when you have active bank accounts in good standing, you are proving that you can manage money. Second, establishing a relationship with a bank improves your chances of getting a loan or credit card through them. If you already do business with a bank, they should be the first place to look. They know you and they value your business. This existing relationship should carry some weight when seeking credit.
Consider taking out a credit builder or savings secured loan with your bank if those products are available. These loans allow you to use your savings as collateral for a loan while building credit.
Apply for a Store Credit Card
You’ve probably been shopping at the mall and been asked if you’d like to sign up for their store credit card to save 10 percent on your purchase but politely declined. Generally, store cards are a bad idea because they lure you in with that upfront discount, and then the ongoing interest rate is very high.
Avoiding these cards is typically a good idea, but the ease of getting one might actually be a good thing if you’re having trouble establishing credit. If you have struck out at the bank, you might want to consider checking with one of a department store and see what type of cards it offers.
If you are approved, you need to be disciplined and use it properly. Don’t treat this new purchasing tool as free money; regard it simply as a means to establish good credit. The limit will probably be low, but you should make an initial purchase with it and subsequently pay the balance off in full. Once the card is active, it should begin to be reported to the credit bureaus. Maintain a good payment history on this card so your credit history can build upon it.
When All Else Fails
If you’ve tried the bank, department store or even credit card companies directly and failed, not all is lost. Secured credit is the last resort, but it is much easier to get than unsecured credit.
When a credit card or loan is secured, it means that there is an asset linked to the account that the lender can take if you fail to make payments. When you have a mortgage or car loan, these are secured loans. If you fail to make payments, the lender will take your house or car to satisfy the debt.
You can establish the same thing at most banks with a secured credit card which requires you to deposit money in an account to secure the credit card. For example, you could obtain a secured credit card with a $500 limit if you put a $500 deposit in the bank that is linked to the card. If you fail to make your credit card payments, the bank takes your deposit. After you maintain that account in good standing for a while, you might be able to obtain a regular credit card or loan.
Read the fine print on secured credit cards so you understand how they work. You should know what you'll pay in interest and fees, as well as whether your initial cash deposit can be refunded to you after a set time period of responsible card use.
Establishing Credit Is Step One
Establishing a good credit history takes time. There are no shortcuts or tricks that can take you from no credit at all to a high score in a matter of months or even a few years. Your credit score is based on a number of factors, like payment history and length of time you’ve had credit, among other measures. So after you have successfully established credit, it is important to do the right things to maintain a good credit score. Always pay at least the minimum due by the due date on credit cards and car loans and mortgages on time.