An estimated 80 million Americans have little or no credit history, according to Experian, one of three major credit reporting bureaus in the country. For those consumers, receiving a car loan or a mortgage – and even applying for an apartment – can be extremely difficult. Fortunately, there are several effective ways to start building your credit history from scratch. Here’s a look at some of your options.
1. Become an authorized user
Your parents raised you, fed you, and put clothes on your back. Now that you’re older, they can also help you establish your credit history by adding you as an authorized user on one of their credit cards. As an authorized user, you’ll have access to your parent’s full line of credit and perhaps more importantly, your credit score will improve every time a payment is made in full and on time.
2. Get a secured credit card
Secured credit cards serve as an excellent introduction to the world of borrowing. Here’s how it works: You make a deposit to a bank or credit union, which uses this money as collateral in case you miss a payment. The amount of your deposit also serves as your credit limit. Because the financial institution isn’t risking very much in these types of transactions, they are more willing to work with customers without credit histories. Upon closing your account, your deposit will be returned to you.
3. Apply for an unsecured card, but not too often
Obtaining an unsecured credit card doesn’t require you to make a deposit. These types of credit cards also tend to have higher spending limits, which is helpful when you need to make larger purchases. That said, it’s important to be strategic about applying for an unsecured card, as doing so will automatically trigger an inquiry on your credit report, which usually subtracts several points from your credit score.
4. Use your new credit card carefully
Once you’ve obtained a new card, be sure to use it responsibly. After years of using cash or a debit card – which isn’t a loan and thus doesn’t help your credit score – getting into the rhythm of doing so may take some time. Also, be aware that exceeding 30% of your total credit limit could lower your credit score, so try to keep your expenses under that threshold.
From helping you land your dream apartment to locking in the best possible rate on a car loan, a healthy credit score can go a long way. But before you get there, you’ll need to establish a credit history to prove that you’re a reliable borrower. Using these tips can set you in the right direction.
Credit card photo via Shutterstock.
The post 4 Ways for People with No Credit to Start Building a Credit History appeared first on NerdWallet Credit Card Blog.
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