Everyone starts out in the same place when it comes to credit. Until someone opens his/her first account, he/she has no credit history. Unfortunately, no one seems to want to be the business that offers the first credit account, so it is often difficult for people to gain access to the benefits of having a credit history. The key to developing a strong credit profile is to start building it before you need it.
- Start with a Credit Card
Opening an account with a credit card company is one of the best ways to create a credit profile. If you cannot qualify for a Visa or MasterCard, then start out with a store credit card to help you build your credit. Just make sure you choose one designed for people with no or low credit and one that reports to at least one of the three major credit reporting agencies – Equifax, Experian, and Trans Union. (Ways to Build Credit)
To make the most of this credit card, use it for small purchases and pay off the balance or at least most of it each month. Always pay before the due date and do not let your payment be late or for less than the minimum required. It will take about six months before the account will be reported, but then you will have a credit history established.
- Get a Secured Credit Card
A secured credit card is often easier to get for a person with no credit history than a traditional or unsecured credit card. You just have to provide a deposit with the credit card company, and they will open a card account in your name. You can use this card just like a regular credit card, and the provider will report your payments to the credit agencies. Approval is easy because there is less risk for the credit card company.
The initial credit limit may be equal to the amount you paid in the deposit or the company may match it for a higher credit limit. Look for a company that allows you to get the deposit back after a series of on-time payments, which will turn the card into an unsecured card. (How to Build Your Credit from Scratch)
- Make Sure Rent Payments Get Reported
In the past, rent payments and utility bills were never reported to the credit bureaus, so you never got credit for paying your biggest bills on time. Now, you have options, but you often must be the one to take action. You can find several online sites where you can make your rent payments, and they will send the payment to your landlord.
One of the most popular is WilliamPaid.com. The site reports your monthly payments to Experian. Of course, failure to make payments on time will also be reported, so you cannot be late if you want to establish good credit. (3 Ways to Build Credit Without Using Credit Cards, 2013)
- Get a Personal Loan
A personal loan is another way to show you are responsible with credit. The easiest way to get a personal loan is through your local bank. Many banks will provide a small loan while using a savings account or certificate of deposit as collateral. As you make payments to repay the loan, they are reported to the credit bureaus.
These loans will typically be for small amounts of $1,000 or less, but you can usually qualify for a bigger loan once you pay off the first one. The terms are generally short, with most loans being due within a year or less. (3 Ways to Build Credit Without Using Credit Cards, 2013)
- Get a Car Loan
Getting a car loan is rather difficult for people with no credit history. However, you can qualify for financing if you have a co-signer or if you make a large down payment. If you have someone willing to co-sign on a loan, you can go to just about any dealer for approval. If you plan to try to get approved on your own, then you will want to shop around and ask about finance companies that work with no credit history.
Establishing credit is not easy, but it can be done. The key is to responsibly manage your new credit to ensure you are building a positive history. After a year or longer, many doors will be open to you with your newfound credit score, but the first step is to start building credit. Get up now and start building. You are at your best when you act now, and the power is now!
Eric Lawrence Frazier, MBA
President and CEO