The first time you try to get a loan or open a credit card, the lender will take a look at your credit report to determine whether you’re likely to repay the loan. Unfortunately, if you haven’t had any loans before, there won’t be much information on your report.
How can you start to build a credit history?
1. Apply for a Credit Card.
When used wisely, credit cards can be helpful tools for building a positive credit history. Before you start spending the loan amount on all the things you want, establish two rules:
- Only spend small amounts that you can pay off within two to four weeks.
- Never let the month pass without paying off the entire loan amount.
Never break these rules, and you’ll find that these tools are a valuable resource even after you have a healthy credit report.
If you don’t qualify for a traditional credit card, you can check out a secured credit card or ask a friend or family member if you can be an authorized user on their card. A secured credit card is generally linked to a savings account and you’ll be limited by a percentage of that savings account. These cards don’t always have an impact on your credit score, so make sure it’ll help you out before applying.
Eventually, whether you have your own credit card or you’re an authorized user, if you have made regular payments on-time, you can ask for a credit limit increase. The higher your available credit and the lower your actual debt, the better your credit history will be.
2. Pay Your Bills on Time.
Your credit report shows whether you’ve made payments on time and how often you’ve fallen behind on your bills. It shows whether you’re a reliable borrower. Although it’s difficult to get a loan without a credit history, you can show that you are a safe risk by paying all your bills on time. This includes rent, utilities, and student loan payments.
In the past, rent and utilities weren’t really recognized on credit reports, but making these payments shows that you have healthy money management habits. When you apply for a loan, bring proof of these timely payments to show the lender. Some credit bureaus are starting to show these payments on their reports, so lenders are more likely to consider rent than they were before.
3. Talk to Your Banker About a Secured Loan.
Some banks offer loans specifically for people trying to establish a credit history. These loans have a lot of different titles, such as “credit builder loans” and “fresh start loans.” Many banks don’t advertise the programs, even if they offer them, and you may be more likely to find the programs through a credit union than a large bank. Although this is called a loan, you won’t be able to access the money until you’ve paid off the loan. This allows you to build your credit while actually putting money into savings. It’s a great way to boost your history and get in the habit of saving for the future.
4. Ask About Lending Circles.
Lending circles are generally run by nonprofit groups. Participants add a specific amount of money to the group, so individuals can borrow amounts without interest. The groups work with credit agencies and the participants build their credit histories. There are some very good reasons to consider participating in a lending circle, but you need to thoroughly research each lending circle before committing your money.
5. Plan Ahead and Be Patient.
It takes time to establish a credit history, so it’s best if you think about getting started before you want to take out a significant loan, such as a mortgage. If you’re a college student, you may already have student loans, so start making payments before they’re due. You’ll need at least 30 to 60 days for any history to show up on your credit report and much longer before you can use the report to gain a large loan. Every once in a while, ask for a free credit score to track your progress.
Remember, the basics for building a credit history include making payments on time, starting with small, starter loans, and steadily paying attention to your credit score. The more you know about how credit works, the better prepared you’ll be for handling credit positively in the future.