You have a good job, and you pay all your bills on time. You’re careful to live within your means, and you even have a nice little savings.
So, why can’t you get approved for a loan, a mortgage or even a credit card? Well, you don’t have the one major thing that lenders are looking for, and that’s a credit record.
If you’re feeling a little confused, you aren’t alone. A lot of young people (and even some older ones) find themselves in a perplexing situation: They can’t get credit because they don’t have any kind of credit because they don’t have a credit history – and they can’t build a credit history because they can’t get anybody to give them credit in the first place.
Here’s how you extricate yourself from this trap and get on the path toward the credit history you need to buy a home and the credit score you want to build the life of your dreams:
Look Into Secured Credit Cards, Store Cards and Bank Cards
When you don’t have any credit history, getting an unsecured credit card can be hard – especially if you don’t want one that has exorbitant yearly fees and a ridiculously high interest rate. Fortunately, there are other options:
- A secured card operates much like a traditional credit card with one exception: You guarantee your own line of credit with a cash deposit that’s equal to whatever credit line you’re permitted to have.
- Store credit cards are another option. If you’ve ever gone shopping at Target, Macy’s or Home Depot, you’ve probably been asked if you wanted to apply for a credit card at the checkout in exchange for a discount on your purchase. Typically, these cards have very relaxed approval standards.
- If you have been with your bank or credit union for a while, you may find them willing to give you an unsecured card with a small limit. This is particularly true when you’ve kept a healthy balance in your account and avoided overdrafts.
In all three cases, you build your credit history by (lightly) using the card and making payments on time every month. After a while, you should qualify for either an unsecured card or a card with a bigger limit – and you’ll be well on your way to having a solid credit history.
Set Up a Joint Account or Become an Authorized User
If you have a loved one who really trusts you (and whom you trust in return), they may be willing to help you get started on this journey in one of two ways:
- Making you an authorized user on their credit card: This would technically allow you to make purchases on their account, but they remain ultimately responsible for the bill. This allows you to benefit from their good credit habits since the account would appear on both your credit records.
- Helping you open a joint account, as a co-signer: In this case, they basically leverage their good credit on your behalf to secure you either a credit card or a loan – but you are responsible for the payments.
In both cases, just make sure that you and the other party maintain good credit habits and pay your bills on time. Otherwise, both your credit records could be negatively affected.
Add Your Rent and Utility Bills to Your Credit Record
You’ve already been paying for things like rent, water, gas and electricity – but credit reporting agencies don’t usually record such things.
You can take charge of your credit situation, however, by looking into rent-reporting services. For a small fee, these services will report your rent payments to one or more of the three major credit reporting agencies (TransUnion, Equifax and Experian). A history of on-time payments will help you quickly build good credit.
Similarly, you can use Experian Boost to get your cellphone, utility payments and a few other regular bills added to your credit report – and that will also help your credit soar. Even though it only affects the score given by Experian, it could be a game-changer when it comes to applying for an unsecured credit card or loan.
Finally, Monitor Your Credit Every Month and Understand Your Score
As mentioned above, there are three main credit reporting agencies, and all three generate what’s known as a “FICO” score that indicates your creditworthiness. Scores range from 300 to 850, with the higher the score the better.
If you hope to get a mortgage in the future, you want to make sure your FICO score is on a steady trajectory upward. You can obtain a free credit report yearly from each company, but it’s often better to invest in a credit monitoring service.
These services will alert you to changes in your scores, help you track information (or misinformation) across all three agencies and give you tips on how to quickly improve your credit based on your unique credit profile.
Patience Is Key, So Do Not Rush This Process
Opening too many lines of credit at once can actually have a negative effect on your credit score, and that’s just as bad (or worse) than having no credit at all. Start small, keep your eyes on your credit report each month and commit to the process over the next few years. Before you know it, you’ll have that sterling credit record you need to apply for bigger loans – or even a mortgage!