Good credit has far-ranging implications for your wealth and lifestyle. Yet getting a credit card to build your credit or rebuild your credit can be almost impossible if you have no credit or bad credit. We reveal four “sneaky” ways to get good credit when starting with no credit history or bad credit. It’s a long game, so get started today.
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Good credit scores open doors and help you live out your dreams.
Like it or not, your credit score affects your life in many profound ways – including whether you qualify for a mortgage and your interest rate, whether a landlord will rent you an apartment, getting insurance or even getting a job.
If you want to build your wealth and financial security, you’d be wise to get a good credit score as soon as possible.
If you don’t have a credit history it can be tricky to get a good credit score — or a loan, credit card, or possibly even an apartment. Landlords can’t discriminate based on race or religion. But they can deny renting to you based on a bad credit score.
The Ultimate Good Credit Score “Catch-22” –
And the Work-Around
How are you supposed to develop a history of responsible loan repayment if no one will even give you a chance? A credit card is the quickest way to build good credit – but you usually can’t get one without good credit. It can feel like the ultimate “catch-22.”
Fortunately, you have some tools to get good credit at your disposal, even with no credit history or bad credit. Just don’t expect it to happen overnight. Here are the top four sneaky ways to repair credit or build credit from scratch that we know of…
4 “Sneaky” Ways to Get Good Credit Scores — Repair Credit or Build Credit from Scratch
1. Get a secured credit card.
A secured credit card is similar to a regular (non-secured) credit card – except they’re backed by a deposit from you that protects the lender in case you don’t pay.
This deposit acts as “security” against the amount you borrow. Hence the name, secured.
You use the card just like any other credit card. (No one else need know.) You buy stuff, make your payments by the due date (a critical step!), and pay interest if you don’t pay your balance in full every month.
It’s like biking with training wheels.
Your deposit acts as your spending limit, your credit line.
Secured credit cards are not meant for long-term use. Their sole purpose is to build your credit strong enough so you can qualify for a regular, unsecured card (without the deposit and with better benefits).
You get your beginning deposit back when you close the secured account.
The fine print…
Make sure your proposed secured card reports your payments to all three credit bureaus – Experian, Equifax, and TransUnion so you get your intended credit score boost.
If you start with no credit score, allow six months or more to move from a secured card to a non-secured one.
Needless to say, use the card responsibly. Make small purchases only, don’t use more than 30% of your credit limit, and pay it off early or on time… never ever late.
Limit your purchases to small things you buy anyway (gas and food), and pay off your entire balance every month. It’s a discipline you won’t regret, and will keep you out of trouble when you later get an unsecured card.
Ask the card issuer if they can upgrade you to an unsecured card in six months. If not, you’ll have to go through the application process all over again.
2. Take out a credit-builder loan.
These aptly-named loans help you establish or build credit. That’s their purpose.
Credit-builder loans are not your typical bank loan. You won’t get the “loan” money till you’ve made a series of payments to pay off the entire loan. It’s kind of like a forced savings plan. You put the money in up front.
These loans are usually offered by credit unions or community banks for small amounts – from $500 to $3,000. Interest rates skew low, from 4% to 12%.
If you have money in a bank or credit union, ask them about a secured loan for credit-building. The money in your bank account or credit union account can be used as collateral against the loan. The interest rate they charge on your credit-builder loan may be higher than what you’re earning on the account, but it may still be worth it.
Check to ensure that your payments will be reported to at least one (if not all three) credit bureaus, or you won’t get your anticipated credit boost from it.
3. Get bills you already pay reported to the credit bureaus.
Your rent, cell phone, and utility bills could help your credit, if you can get them reported on your credit history.
Rent-reporting services like RentTrack can take a bill you’re already paying (i.e., rent) and put it on your credit report, to help create your history of on-time payments.
A fee usually applies – about 1% to 3% of the rent. It can be paid by either you or your landlord.
Not all credit bureaus consider these payments. But those that do may enable you to get a loan or credit card that boosts your credit worthiness across the board.
RentTrack says they’ve seen average credit boosts of 29 points in just two months, and 132 points in two years.
Experian Boost enables you to get your cell phone and utility bills into your credit report – but only with Experian, and credit scores that use Experian.
4. Become an authorized user on someone else’s account.
Finally, if none of those work, a final option is to get added as an authorized user on someone else’s credit card account.
For this to work, approach someone who loves you very much and who manages his or her money very well. This person will be doing you a very special favor. Don’t abuse the privilege.
Explain that you have no intention of actually using the credit card or even possessing the card. You just want to be added to their account in order to build credit.
When you’re an authorized user, the account shows up on your credit report as well as their credit report. By extension, your credit report reflects the primary cardholder’s timely payments and (hopefully) their good credit utilization rate.
Make sure you agree all around on whether and how you’ll use the card before you start. Pay your share of whatever deal you strike.
Ask the credit card company these questions beforehand:
- Can you get off the account without the cardholder’s permission?
- Does the card issuer report authorized users to at least one of the three major credit bureaus? (Some don’t. You want one that does.)
- Does the issuer report positive and negative info on authorized users?
- What happens to your credit after you leave that account?
Money Habits that Build Good Credit
Building good credit takes time – a longish history of on-time payments. Be in it for the long game.
1. Make every payment on time (or better yet, early!).
Even utilities and cell phone bills. Set reminders. Develop a system for keeping track so you don’t forget. When making online payments make sure you finish it to the final step or it won’t show up as paid. I once had a mix-up with my cell phone bill. It wasn’t forwarded with my mail and bills got lost during a cross-country move. By the time I knew what happened, they’d turned it over to collections. It dinged my credit score for a very long time.
2. Never max out your credit cards.
Don’t even come close! Keep your utilization below 30% on all cards. The sweet spot is actually 1% to 10% of your total credit limit. Credit utilization is the second most important factor in your credit score. Issuers absolutely hate to see you nudge toward your limits. So make this an iron-clad rule for yourself. Pay down your cards till you fit into the 1% to 10% utilization window.
3. Space credit applications six months apart.
Every application triggers a small temporary drop in your score. Multiple applications in short succession can cause a major drop. It may also convey desperation. See exception below.
4. Keep accounts open, even if you don’t use them.
Unless you have a very compelling reason to close them. Account closures can hurt your utilization percentage. Plus, it reduces your average length of accounts which also hurts your credit score.
Check your annual credit reports today. Look for errors and discrepancies. Dispute any errors you find. Mistakes can lower your score. And they’re far more common than you think. Keep track of what’s going on with your reports and scores, so you can access funding to fulfill your dreams.
If you have bad credit or no credit, start this process at least two years before you intend to buy a home to give yourself adequate time to build up a reputation of repayment – also known as your credit score.
“Pro” Credit Application Tip
Pro Tip: Before applying for credit, pull your own credit report and print it. This is in effect a “soft inquiry” and won’t lower your scores.
Physically take your printed report to a local bank or credit union. It’s best if it’s a bank or credit union you already have a relationship with.
Show them your reports, but don’t let them pull a credit report on you till they first commit to approve you. If they say yes, they’ll have to pull credit on you to seal the deal.
But if they say no, you just spared yourself a big hit on your credit score. Declines are never good for your credit score. Now you’ve preserved your chance to ask another lender for a credit card.
Note: There are special rules for mortgages and autos. If you want to shop for the best loan, do your research first and consolidate all applications and inquiries into a 14-day period. This way it counts as one inquiry, not many.