Everything You Need to Know About Starting with No Credit
Starting with no credit can be a major hurdle in today’s financial landscape. Why?
Without a credit history, lenders have no record of how you've handled borrowing money in the past.
Is that wrong? Well in a way.
It goes like this - When you try to borrow money, lenders want to know if you’re reliable. The way for them to do it is to check your credit history. Lenders make money by charging interest on the money they lend.
Without a record to look at, lenders have no information about you. Thus, they see you as a risky bet.
This can make it tough to get approved for loans. You might struggle to buy a home or even find an apartment to rent. And it doesn't stop there. Some employers also look at credit scores when hiring.
Without a credit history, you could miss out on great opportunities. You can also end up paying more for things, like loans and credit cards.
Sounds terrible, right?
Don’t worry, you are on the right page! With my years of experience helping people with anything about credit, I have the most effective ways to build your credit from scratch.
I’m here to help. Today, we’ll cover:
What is Credit?
What is a Credit Score?
Starting with No Credit
Steps To Starting Building Credit
Managing and Improving Your Credit
No Credit FAQs
Introduction to Credit
Did you know that 26 million Americans are “credit invisible”?
This means they have no credit history with any major credit reporting agencies.
On top of that, an additional 19 million people have credit records that are too sparse or outdated to be scored.
This is a BIG issue that needs to be addressed!
You must know that a good credit score is essential for many aspects of life. If you're to ask me, it's too important to be taken for granted. I've met countless people filled with regret because they never prioritized building their credit.
What is Credit?
Credit is essentially borrowing money with the promise to repay it later. Lenders use your credit score to determine how likely you are to repay them.
Importance of Credit
Loan Approvals: Good credit increases your chances of getting loans.
Interest Rates: Better credit scores lead to lower interest rates.
Renting: Landlords often check credit scores before renting out apartments.
Employment: Some employers look at credit scores as part of the hiring process.
Would you like to learn more information about credit scores? How about building a strong one or avoiding credit pitfalls? If you do, read on.
What is a Credit Score?
A credit score is a number that represents your creditworthiness. The most common scores are FICO and VantageScore.
Credit scores typically range from 300 to 850, with higher scores indicating a lower risk to lenders. This means you're more likely to qualify for loans with better interest rates. Learn here how to read and understand your credit report.
However, this scoring system isn't just randomly generated.
Whatever your current score is, there's always a reason behind it.
Factors Affecting Credit Scores
Knowing what affects your credit score is crucial as you start putting your credit into pieces.
Here’s a breakdown of the key factors:
1. Payment History (35%)
Your payment history is the most influential factor in your credit score. It shows whether you pay your bills on time. Paying your bills, such as credit cards and loans, on time helps build a positive credit history and shows that you are responsible for managing your credit. Late payments can hurt your score, so try to always pay on or before the due date.
2. Amounts Owed (30%)
This factor looks at how much debt you currently have compared to your credit limits. It's not just about having debt—it's about how you manage it.
Keeping your credit card balances low relative to your credit limit is substantial. Ideally, you should use less than 30% of your available credit to keep your score in good shape.
3. Length of Credit History (15%)
The longer you’ve had credit accounts open, the better it is for your score. This factor considers the age of your oldest account. It also looks at the age of your newest account. Additionally, it takes into account the average age of all your accounts. Even if you’re new to credit, starting now and keeping your accounts open for as long as possible will help improve your score over time.
4. Credit Mix (10%)
Having a variety of credit accounts—like credit cards, loans, and retail accounts—can benefit your score. It shows that you can manage different types of credit responsibly. However, it’s not necessary to have every type of credit. Just managing the ones you have well is enough.
5. New Credit (10%)
This factor considers how many new credit accounts you’ve opened recently and how many recent inquiries are on your credit report. Opening too many new accounts in a short time can negatively impact your score because it may suggest that you’re taking on too much debt. (Debt that you will find hard to pay in the future.)
Understanding these factors is crucial as you begin building your credit from scratch. Next up, I’ll share some steps you can take to start establishing your credit history.
Starting with No Credit
Having no credit is a big struggle and it’s not only you.
Many people find themselves in the position of having no credit for various reasons. Understanding this can help you take the right steps to build your credit history.
Why You Might Have No Credit
The most common reasons for having no credit are:
Young age: If you’re young and just starting, you might not have had the opportunity to build a credit history yet. Credit histories take time to develop, and without credit accounts or loans, there’s no track record to show lenders. This is a common situation for recent graduates or young adults who haven’t taken out loans or opened credit accounts.
New to the country: If you’ve recently moved to a new country, you may find yourself without a credit history. Credit histories are typically country-specific. Even if you had good credit in your previous country, you’ll need to start building it anew in your new country.
Cash lifestyle: If you prefer to use cash or debit cards for all your purchases, you might not be building any credit. Unlike credit cards and loans, cash and debit card transactions do not get reported to credit bureaus. Therefore, while using cash might be a smart budgeting choice, it doesn’t contribute to your credit history.
Limited Financial Activity: If you haven’t had many financial transactions, such as loans, credit cards, or other forms of credit, you might not have a credit history. This can include not having any student loans, auto loans, or credit card accounts.
Personal Choice: Some people choose to avoid credit altogether to maintain financial privacy or avoid potential debt. While this is a valid choice, it means you won't have a credit history to show when needed.
Recognizing why you have no credit is the first step.
Now, let's look at how to start building your credit effectively and responsibly.
Steps to Start Building Credit
Get a Secured Credit Card
One of the best ways to start building credit is by getting a secured credit card. This card requires a cash deposit, which serves as your credit limit.
It’s a great way to establish a credit history when you have none.
How It Works:
Application: Apply for a secured credit card through a bank or credit union.
Deposit: Deposit a certain amount of money with the card issuer. This deposit acts as collateral and usually determines your credit limit. For example, if you deposit $500, your credit limit will typically be $500.
Usage: Use the card for small purchases and pay off the balance each month. This helps build your payment history and demonstrates responsible credit usage.
Benefits:
Easier to Obtain: Secured credit cards are easier to get approved for, even with no credit history.
Establishes Payment History: Using the card and making timely payments helps establish a positive payment history, which is crucial for building credit.
Potential to Upgrade: After a timeline of responsible use, many secured cards allow you to transition to an unsecured credit card, returning your deposit.
Recommended Secured Credit Cards:
Discover it® Secured Credit Card.
Deposit Range: $200 - $2,500
Key Features: No annual fee, cashback rewards, and reports to all three major credit bureaus. Discover matches all the cash back you've earned at the end of your first year.
Capital One Platinum Secured Credit Card
Deposit Range: $49, $99, or $200 for a $200 initial credit line.
Key Features: No annual fee, access to a higher credit line after making your first five monthly payments on time.
Deposit Range: $200 - $2,500
Key Features: No annual fee, reports to all three major credit bureaus and offers tools to help you monitor your credit.
Bank of America® Customized Cash Rewards Secured Credit Card
Deposit Range: $300 - $4,900
Key Features: No annual fee, cash back rewards program, and free access to your FICO® Score.
OpenSky® Secured Visa® Credit Card
Deposit Range: $200 - $3,000
Key Features: No credit check required to apply, reports to all three major credit bureaus, and relatively low annual fee.
Remember: Use it responsibly by making small purchases and paying off your balance in full each month. Over time, this will help establish a solid credit history and improve your credit score.
Become an Authorized User
Another effective way to start building credit is by becoming an authorized user on someone else's credit card account. This method can give you a significant boost if you're starting from scratch.
Process:
Find a Trusted Person: Ask a family member or close friend with a good credit history if they would be willing to add you as an authorized user on their credit card.
Get Added: The primary cardholder contacts their credit card issuer to add you as a user. You will receive a card with your name on it, linked to your account.
Advantages:
Benefit from Their Good Credit: The primary cardholder’s account history, including on-time payments and credit utilization, will appear on your credit report, helping to build your credit score.
No Payment Responsibility: You gain the advantages of good credit behavior without being responsible for making payments. This remains the primary cardholder's duty.
Quick and Simple: Becoming an authorized user is a straightforward process and can rapidly improve your credit profile.
Tips for Success:
Choose Carefully: Ensure the primary cardholder has a strong credit history with consistent on-time payments and low credit utilization. Their credit usage will directly affect your credit report.
Set Clear Terms: Agree with the primary cardholder on how you will use the card. Often, it’s best not to use the card at all to avoid complications.
By becoming an authorized user, you can use the good credit record of someone you trust to start building your credit. It’s a smart and practical step towards establishing a solid credit foundation.
Apply for a Credit-Builder Loan
How It Works: A credit-builder loan is designed to help individuals build credit. You borrow a small amount of money, but instead of receiving the funds immediately, the money is held in a savings account or certificate of deposit (CD) until the loan is fully repaid. This account acts as collateral.
As you make regular payments, you are building a positive payment history, which is reported to the credit bureaus.
Where to Apply: Credit-builder loans can typically be obtained from several types of institutions:
Credit Unions: Many credit unions offer credit-builder loans with favorable terms for their members.
Community Banks: Local banks may offer these loans as part of their personal finance products.
Online Lenders: Some online financial institutions and fintech companies specialize in credit-builder loans.
What You Need: To apply for a credit-builder loan, you generally need:
Identification: A valid government-issued ID (e.g., driver’s license, passport).
Proof of Income: Recent pay stubs, bank statements, or other documentation showing your income.
Address Verification: Utility bills, lease agreements, or other documents that confirm your current address.
Credit History: While some lenders may not require a credit history, having one can help speed up the process.
Outcome: By consistently making on-time payments, you demonstrate your creditworthiness to lenders. This can help you establish a positive credit history and improve your credit score.
Once the loan is paid off, you receive the funds from the savings account or CD, and you will have built a stronger credit profile.
Use a Co-Signer
A co-signer is an individual who agrees to share responsibility for repaying a loan or credit card balance. The co-signer has a strong credit history and agrees to cover the loan payments if the primary borrower defaults. This agreement helps the borrower secure credit that they might not otherwise be able to obtain on their own.
How It Works: When you apply for a loan or credit card with a co-signer, the lender considers both your credit profile and the co-signer’s credit profile. The co-signers good credit can increase the likelihood of approval and may even secure better loan terms, such as a lower interest rate.
However, both the borrower and the co-signer are legally responsible for the debt.
Pros:
Increased Approval Chances: Having a co-signer can make it easier to get approved for loans or credit cards, especially if you have a limited or poor credit history.
Better Terms: The co-signer’s strong credit may help you secure better loan terms, such as lower interest rates or higher credit limits.
Cons:
Risk to Co-Signer’s Credit: If you miss payments or default, it will negatively affect the co-signer’s credit score.
Potential Strain on Relationships: Financial disagreements or missed payments can strain relationships with the co-signer, often a close friend or family member.
What You Need:
Co-Signer’s Agreement: The co-signer must agree to take on the responsibility and be involved in the application process.
Co-Signer’s Information: Provide the co-signer’s personal information, such as their social security number, income details, and credit history.
Open a Store Credit Card
Features: Store credit cards are issued by specific retailers and are typically easier to qualify for than major credit cards. They often come with lower credit limits, making them less risky for the issuer.
Store credit cards can be a good starting point for building credit, especially if you have little or no credit history.
How It Works: When you open a store credit card, you can use it to make purchases at the issuing retailer. These cards often offer special discounts or promotional financing for store purchases, which can be appealing. However, they usually have high interest rates and may come with annual fees.
Warnings:
High Interest Rates: Store credit cards often carry higher interest rates compared to general credit cards. Carrying a balance from month to month can lead to significant interest charges, making it costly.
Limited Use: Store credit cards are usually only usable at the issuing retailer or their affiliated stores. This limitation can be inconvenient compared to major credit cards that are accepted widely.
Potential for Debt Accumulation: Due to high interest rates, it’s crucial to use the card sparingly and pay off the balance in full each month to avoid accumulating debt.
What You Need:
Identification: A valid ID such as a driver’s license or passport.
Income Verification: Proof of income to demonstrate your ability to repay.
Credit History: While some store cards are designed for individuals with limited credit history, having a basic credit history can still be beneficial.
Managing and Improving Your Credit
Once you’ve established credit, the next important step is learning the right way to manage it.
Here are some key strategies to take note of:
Tips for Maintaining Good Credit
Pay Bills on Time: Late payments hurt your score.
Keep Balances Low: Aim for a credit utilization rate below 30%.
Monitor Your Credit Report: Check for errors regularly.
Avoid Excessive New Credit Applications: Too many applications can lower your score.
Good Read: 15 Easy Ways to Fix Your Credit and Boost Your Score
Using Credit Responsibly
Budgeting: Only charge what you can pay off each month.
Emergency Fund: Have savings to avoid relying on credit in emergencies.
Financial Literacy: Learn about credit management and planning.
Monitoring and Protecting Your Credit
Credit Reports: Get free annual reports from the three major bureaus (Equifax, Experian, and TransUnion).
Credit Scores: Use free ai credit repair services or your credit card issuer to monitor your score regularly.
Protecting Against Identity Theft
Credit Freezes: Prevent new accounts from being opened in your name.
Fraud Alerts: Alert creditors to take extra steps to verify your identity before extending credit.
No Credit FAQs
Q: How long does it take to build good credit from scratch?
A: Typically, it takes six months to a year of responsible credit use to see a decent score.
Q: What’s a good credit score?
A: If you want to have good credit, aim for a 720 credit score or higher.
Q: Can I build credit without a credit card?
A: Yes, you can use credit-builder loans, become an authorized user, or report rent payments to credit bureaus.
Q: Does checking my credit score hurt my credit?
A: No, checking your credit score is a soft inquiry and does not affect your credit.
Conclusion
Starting with no credit can feel overwhelming, but it’s important to remember that everyone begins somewhere. By taking the right steps to build and manage your credit, you can create a solid foundation for your financial future. Whether it’s through applying for credit-builder loans, using a co-signer, or responsibly opening a store credit card, each action you take helps build your credit history.
If you haven’t started your credit journey on the right foot, don’t worry—it’s not the end. Our credit dispute software is here to help you get back on track and improve your credit.
With the right tools and strategies, you can overcome early challenges and work towards a healthier credit profile.
Start today and take control of your financial future with confidence.
