The highlights:
- Your credit history is directly tied to your credit score which can help you get approved for loans and lines of credit.
- There are a few tools to help you start building credit, such as secured loans and credit cards or getting the help of a trusted co-signer.
- Making on-time payments and not using too much of your available credit are two key ways to help you maintain a positive credit history.
Not sure if you need to build credit? Here’s why you do.
Credit can be a crucial part of our financial lives, yet approximately 45 million Americans could be considered “credit invisible,” meaning they don’t have a documented credit history.1 Building a credit history could help you borrow money from lenders so you can accomplish specific goals like paying for college or buying a home or a car.
Your credit history is directly tied to your credit score, which is a number ranging from 300 to 850 that can help tell lenders how well you manage your credit. Generally, a higher credit score could make it easier to borrow money and pay lower interest rates. Having a low or non-existent credit score typically means your loans are at higher interest rates, and that could mean paying hundreds of dollars more each month—money that could be put into an emergency savings account.
And credit history impacts more than just borrowing money. It can also impact the premium you pay on your auto insurance, whether a landlord accepts your rental application, or even whether an employer chooses to hire you.
Podcast episode: Listen to Smart borrowing habits with David Smith from Money and Mindset With Bright and Brian.
To get a baseline for your current credit history, request a copy of your credit report from AnnualCreditReport.com. (You can get a free copy once a year from each of the three major credit reporting agencies.) If you don’t have much activity on your report, these next tips can help you establish a credit history.
4 ways to build credit with no credit history
1. Get a secured loan or credit card.
If you’re ready to build your credit, a secured loan or credit card can help you start. Both require a small upfront deposit, which the lender uses as collateral in case you don’t make your payments. Once you close the account or the loan term ends, you can get that collateral back—so long as you’ve been making timely payments and your account is in good standing.
Basically, by giving the lender money as collateral, it lowers some of the risk that they see from you not having any credit history.
2. Become an authorized user on someone else’s account.
You can become an authorized user on an account if someone close to you (like a family member) adds you to their existing account. This option is most common with credit cards. For example, if they have a travel rewards credit card, they can add you as an authorized user, and you’ll get the same card but with your own name on it. This card would still be tied to your family member’s account, so just remember that if you decide to use it, you’re really charging that purchase to someone else’s account.
As long as you and that family member are responsible with the credit line and make payments on time, you can both build good credit histories together. Plus, it removes the barrier of you having to open an account in just your name.
3. Use a co-signer.
Getting a co-signer is another way you could try getting your first loan or card. Your co-signer would work alongside you to take out the loan or open the credit card and sign the paperwork with you. By doing this, your co-signer agrees to be legally responsible for paying the debt if you don’t pay it as agreed.
Using a co-signer with good credit might get you access to better terms than you would otherwise be offered. But heads-up: If you don’t make timely payments, both your and your co-signer’s credit will be negatively affected. Make sure you and your co-signer understand that you’re in it together and are responsible for your use of the loan.
