Credit is a lot like fire. It can be used to keep you warm, feed you, and create new inventions. On the other hand, it can also burn you if you aren’t careful with it.
Does that mean fire is a bad thing and should be avoided? Of course not. And the same is true with credit. Building credit is important and can grant you a lot of opportunities in life. However, it’s equally important to be responsible with credit. Otherwise, you’ll be in a world of hurt.
Today, you’re going to learn how to go from no credit to good credit. You’ll learn the tactics and strategies you can use to build your credit. But most importantly, you’ll learn how to manage credit, so that you can use it without getting burnt. Let’s begin.
Start using credit
This might seem obvious, but to go from no credit to good credit, you have to begin actually using credit. But there’s a problem. How can you start using credit without any credit history?
Most lenders want to see at least some credit history. And many require an established credit history with an exceptional credit score of 720 and above.
Luckily for you, there are lenders out there looking for zero credit borrowers like yourself. The programs that these lenders offer are specifically designed to build your credit history if you have none.
Let’s go over five ways you can build your credit if you don’t have any to begin with.
1. Apply for a secured credit card
However, just because you are depositing money into an account doesn’t make this a debit card. Secured credit cards still work the same way a regular credit card does aside from the initial deposit.
When you use your secured credit card to make purchases, you must still follow credit card best practices, such as paying your balances in full and keeping your utilization low.
2. Apply for a student credit card
Student credit cards can be another great starter card if you have no credit and want to build good credit. Student credit cards are different from secured credit cards in that you aren’t required to make an initial deposit. Instead, you are approved for a certain credit line and can draw from that credit.
It’s crucial that you remember to pay back your balances in full every month to avoid late payments, which will negatively impact your credit score.
A good credit tip to live by: never spend more on your credit card than you can afford to pay back immediately. Like regular credit cards, student credit cards can offer perks and rewards such as cash back on purchases, retailer discounts, and no annual fee.
Finally, to apply for a student credit card, you must prove that you are, in fact, a student. Some cards don’t require proof, such as the Journey® Student Credit Card From Capital One®, but most do require proof.
3. Apply for a credit-builder loan
If you’d prefer to build your credit without using a credit card, you can apply for a credit-builder loan. A credit-builder loan only serves one purpose: to help you build your credit history, which increases your credit score.
When you take out a credit-builder loan, you do not get any money. This is unlike a regular loan that gives you a lump sum of money upfront, which you must pay back in full with interest.
For example, when you get a personal loan, auto loan, or student loan, the lender gives you a lump sum of money that you must pay back over time. However, credit-builder loans work a little differently. When you are approved for a credit-builder loan, you must give the lender money instead of the lender giving you money. You make small payments every month, similar to paying back a traditional loan.
The only difference is that the money you are paying is going into a special savings account. Once you’ve completed the credit-builder loan payments, the lender will release your money back to you. You can get credit-builder loans at most banks and credit unions. There are even some online lenders and new services such as Self and Upstart that you can use.
4. Become an authorized user
Becoming an authorized user on someone else’s credit card is an easy way to go from no credit to good credit. The advantage of doing this is that you don’t actually have to use the credit card to benefit. It can be a completely passive way of building good credit.
Let me explain. Say your sister has good credit and lets you become an authorized user on her credit card. Well, everything your sister does not only affects her credit score but yours now as well.
For example, if your sister continues making on-time payments, keeps her utilization low, and displays signs of a responsible borrower, this will all be added to her credit report. But it doesn’t stop there. Since you are an authorized user on your sister’s credit card, her activity will also be added to your credit report.
You can see how this could massively benefit you. However, as much as it could help, it can also be dangerous. Let’s say your sister suddenly loses her job and can’t pay her credit card bill. Well, guess what? The same way the good stuff is added to your credit report, the bad stuff will also be added.
If she is missing payments, maxing out her credit line, and being irresponsible, your credit will suffer just like hers.
Becoming an authorized user is a double-edged sword. Do your due diligence and ensure that the primary cardholder is a responsible user who has an impeccable track record. The last thing you want to do is go from no credit to bad credit.
5. Get a co-signer to sign for a real credit card
If you have someone who trusts you, you can ask them to co-sign on a credit card application for you. When you get a friend or relative to co-sign for you, they are essentially vouching for you. They’re telling the lender that they will back you up if you can’t make payments.
This, for obvious reasons, can be dangerous. If you do start missing payments, your co-signer will suffer, and your relationship with them may suffer as well. Only use a co-signer if you know, without a doubt, that you can pay all your credit card bills on-time, and preferably in full.
Use credit responsibly
You will never have good credit if you can’t use credit responsibly. If you are always late on payments, maxing out your cards, and being irresponsible, your credit score will reflect that, and lenders will be afraid to give you any money.
Although there are many things you can do to use your credit responsibly, there are three big things you should focus on. If you can get at least these three things right, then your credit will skyrocket.
- Pay your credit cards off each month: You must make it a habit of paying off your credit cards in full each month. If you don’t, you will fall into the same trap 55% of Americans do. In credit card debt, paying hundreds in interest, thinking credit cards are bad. By habitually paying off your credit cards every month, you can avoid all the fees and interest that make credit card companies so much money.
- Never pay your credit card bills late: Payment history makes up a massive 35% of your credit score. That’s a little over a third of your score. This means even a single late payment on your credit report could have a big impact on your credit score. Late payments stay on your credit report for seven years and hurt your score the entire time. This is unlike hard inquiries that remain on your report for two years but stop affecting your score after six months to a year.
- Never max out your credit cards: An easy way to give your credit score a boost is to consistently use your credit card and avoid maxing out your credit line. The second largest factor of your credit score is your credit card utilization, which makes up 30% of your score. To improve your credit, you’ll want to keep your credit utilization under 30%. For example, if you have a $1,000 credit line, try never to have over a $300 balance.
Monitor your credit
Once you start building your credit, it will be essential to monitor your progress. You can do that by checking your credit score and credit reports frequently. Monitoring your credit is important for a few reasons.
First, it helps prevent identity theft, especially in its early stages, before any real damage is done to your financial reputation. You don’t want to spend years building your credit from nothing to something good, only to have it ruined by a thief.
Another good reason to monitor your credit is to get notified when hard inquiries land on your credit report. A hard inquiry is usually an indicator of a new loan or credit card being opened, and if you didn’t authorize that, you could stop it.
So, now that you know why you should monitor your credit, the next question is, how? What tools do you use? The answer lies ahead.
Tracking your credit score
Tracking your credit score can be done entirely free and easily using Credit Karma. Credit Karma lets you see both your TransUnion and Equifax credit scores at any time for free.
I use the Credit Karma app on my phone to check my credit score every week. Credit Karma has many intuitive tools you can use to see why your score is going up or down. It then gives you recommendations on how to continue improving your score.
And did I already mention it’s completely free? No strings attached.
Tracking your credit report
There are two ways you can track your credit report:
Both let you see your full credit report. However, the difference is that AnnualCreditReport.com is a website that the three credit bureaus have set up to comply with the Fair Credit Reporting Act. You can only get your full credit report once every year.
However, myFICO lets you monitor and view your credit report anytime, anywhere.
Going from no credit to good credit is really not all that difficult. As you just learned, there are only a few basic principles that you must follow to build and maintain your credit.
Additionally, as long as you follow the advice in this guide about the potential dangers of credit, you’ll stay out of trouble.
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