How to Build Credit When You Have None

At first glance, the credit system looks like a classic catch-22. You need to have good credit to qualify for credit accounts, but you need credit accounts to have good credit. 

It can make figuring out how to build credit when you have none a frustrating challenge – if no one shows you the tricks.

This guide will teach you how to get quality credit accounts without any credit history and how to leverage them into a strong credit profile as quickly as possible.

Get a Credit Builder Loan

When you’re trying to build credit from scratch, the most significant hurdle is that you don’t have the credit score necessary to apply to most credit accounts.

That limits your options to lenders who don’t check your credit history or are willing to overlook a lack of one.

Unfortunately, some of these accounts can be extremely expensive. For example, a payday loan, car title loan, or pawnshop loan can all easily trap you in a cycle of high cost debt. 

That’s because their strategy for lending to risky borrowers is to charge a high enough interest rate that they can still generate a profit, despite increased default rates.

Not only is it best to avoid these loans because of their price tag, but it’s also better for building credit since they don’t usually report to the three major credit bureaus anyway.

You’re much better off working with a bank, credit union, credit card company, or other financial institution that will report to a credit bureau and contribute to your history.

Many of these lenders use some form of collateral to protect them in case of default. 

A credit builder loan (like Credit Strong’s) is one of the best accounts that build credit. They don’t require you to bring any money to the table, like a secured credit card would. Using this type of secured credit-builder account is much more affordable and safer for responsible borrowers who are genuinely interested in building credit.

The loan proceeds act as the security deposit, giving both the lender and borrower the best of both worlds. 

Once you pay off what is otherwise a traditional installment loan, you can take the money and use it however you wish. 

Check out Credit Strong’s plans and pricing here.

Apply for a Secured Credit Card

A secured credit card is the classic starter credit card. The card issuer uses a cash deposit as collateral to protect the card issuer from losing money.

The borrower has to fund this deposit after getting approved for the credit card. The amount of the deposit is usually equal to the credit limit on the card. 

Because the borrower can’t spend more than the lender has locked away as a deposit, the risk to the lender is minimal.

Many lenders offer secured credit cards specifically to people with poor credit, a short length of credit history, or no credit at all.

You should always investigate the details before applying for one, including the policy on graduating the account into an unsecured credit card. Some secured card issuers may return your deposit and upgrade the account to an unsecured card after six to twelve months of good payment behavior.

Become an Authorized User

An authorized user of a credit card is an individual who is entitled to use a line of credit to make purchases. In general, anyone can add you to their account as an authorized user on their credit card. (More recommendations on this below.)

They could add you to any personal credit card, including a store credit card if they wish. It doesn’t require a credit check, so they can do it even if you have no credit (though there may be a fee for some cards).

Once someone adds you to their account, they can choose whether or not to give you access to the credit card to allow you to make purchases.

Either way, the activity will soon show up on your credit report, and the usage will determine its effect on your credit.

However, authorized users have no responsibility to pay their balances, so you can’t just ask anyone off the street. And we highly recommend that you only become an authorized user of someone that you know well.

If a family member or spouse with good credit is willing to add you as an authorized user to one of their credit card accounts, you can build a good credit history with little effort. 

Still, because authorized users have no liability for their balances, the card’s activity won’t have as much impact on your credit as it does the primary account holder’s.

The bottom line is that being added as an authorized user links your personal credit to someone else’s and lets you piggyback off of their history.

It can be an easy win, but it’s not enough to get you to excellent credit on its own and can put you at risk if you choose the wrong person. If you are added as an authorized user to a cardholder that doesn’t make their payments on time, their poor payment history will show up in your credit profile.

Student Loans Can Help Build Credit

Student loans are among the most burdensome type of debt, and there are many reasons to avoid them. 

While their interest rates are relatively low, they can and often do linger for decades. Adults between 30 and 45 years old owe almost half of all student loan debt.

However, there is at least one advantage to taking on student loans. They can help you start building credit history from an early age. 

They’ll help diversify your credit mix (which accounts for 10% of your score) among both types of credit if your other accounts are all revolving. 

Of course, building credit is not a good reason to take out a student loan, but if you’re going to do so anyway, it might as well be a net positive to your credit score. Make sure to make all your payments on time once they begin after college.

Consider a Student Credit Card

If you’re currently a student or under 21 years old, a student credit card can be a viable option. While they’re not as readily available as they used to be (lenders used to hand them out to students like candy at Halloween), they’re usually still available to students with no credit history.

Since the Credit Card Act of 2009, lenders have to verify that people under 21 years old can pay their debts before providing them with a credit card.

That means if you have an independent income or a willing cosigner (such as a parent) with the means to pay, you should be able to qualify without a credit score.

While your student credit card is likely to be an unsecured card, it will also usually have a low credit limit. 

The relatively low available credit combined with the assurance that the student has the cash flow to pay their debts is often enough to convince a lender to provide a line of credit.

Student credit cards also often have some perks that are specifically useful to students. 

For example, they might provide flat rewards for good grades or extra cashback in expense categories that students are likely to use like grocery stores, Amazon, or gas stations.

Make On-time Payments Every Month

Remember, qualifying for a credit account is only half the battle. You have to use your credit accounts responsibly to prove to future lenders that they can trust you. Most importantly, that means making a timely payment each month.

Your payment history is worth a whopping 35% of your FICO Score, the most popular credit score among lenders. That means that if you miss a payment, even once, your credit score can take a significant hit.

Late payments stay on your credit report for seven years, and though their impact will decrease over time, they can remain a big deal for a long time, especially if you’re late by more than 30 days. 

Keeping an emergency fund to cover your monthly payments should you ever lose your income is a great idea.

It’s also helpful to set up an autopay that makes your minimum monthly payment each month. While it’s always best to pay off your balances in full to avoid interest, an autopay will at least protect your credit score.

Don’t Use Too Much Credit

Your outstanding balances are another significant portion of your credit. FICO calculates 30% of your credit score just from your outstanding balances. That’s second only to your payment history.

Your overall debt-to-income ratio is also a significant metric when you’re applying for new accounts, especially your mortgage. You want to keep that ratio as heavily weighted toward income as possible, even if you’re not shopping for a home.

In general, you want potential lenders to be sure that you can afford your debt in addition to regular expenses like your rent payments, food costs, and transportation expenses.

If possible, try to keep your credit utilization at 10% or less for credit cards too. The ratio equals your outstanding balance divided by your credit limit. For example, if you have a balance of $500 on a card with a limit of $2,000, your credit utilization rate is 25%.

That doesn’t mean you can’t use more than 10% of your limit in a month. Just make sure you pay your balances off before your credit utilization rate creeps up over the line.

Doing so also helps you keep your balances within a manageable level and ensures you can afford your monthly payments. Ideally, you should never spend more money on your credit card than you have in liquid cash to avoid any risk to your payment history.

Don’t Get Too Many Hard Inquiries on Your Credit Report

Whenever you apply for new credit, your prospective lender will pull your credit report and check your credit score. That shows up on your report as a hard inquiry, too many of which can harm your credit.

One hard inquiry on its own usually won’t lower your score by more than a couple points or so. 

New credit activity accounts for just 10% of your FICO Score. Hard credit inquiries from lenders stay on your credit report for two years, but FICO only considers those from the previous twelve months.

If it looks like you’re opening up too many accounts at once, FICO will see that as a sign of increased risk and penalize you. 

To avoid this, you should try to keep your inquiries as close together as possible for accounts that involve rate shopping like a car loan, student loan, or mortgage.

The strictest FICO formulas allow no less than a 14-day window, so you’ll always be safe if you can keep it within that.

Keep in mind that these only apply to accounts that commonly involve rate shopping, not credit cards. If you apply to multiple credit cards close together, they each count as a hard inquiry.

Be Aware of Identity Theft

Identity theft can be dangerous for a lot of reasons. Scammers can drain your investment accounts, clone your debit card and drain your bank account, or attempt insurance fraud using your identity.

Identity theft also often causes significant damage to your credit score. Most often, thieves attempt to open up new accounts in your name and rack up thousands of dollars of debt, leaving you with the bill.

There are protections in place to protect you against this type of credit fraud, but they’re not foolproof. Even if you eventually clear your name and waive the fraudulent debts, it will cost you valuable time that you could otherwise spend building credit.

To avoid this, be very careful with your personal data and consider placing a freeze on your credit. They can prevent unauthorized applications for new accounts.

FAQs

How long does it take to build credit if you have none?

VantageScore will give you a score after a month of credit history, but you usually need three to six months of activity before lenders can give you a FICO Score.

Remember, that’s just to have any score at all, and it will take longer to build a good credit score. However, with timely payments, you should be able to reach a good credit score in about 12 to 24 months.

What is your credit score if you have no credit history?

If you have no credit history, then you don’t have a credit score. It is not equivalent to having a credit score of zero (there’s no such thing).

Is no credit good credit?

No, no credit is not good credit, but it is better than having bad credit. Building credit is often much easier when you don’t have any negative factors holding you back.

Good behavior will increase your score faster when you start from scratch than it will if you’re working to overcome a negative credit history.

You’ll also be able to qualify for accounts that cater to people with no credit history, while people with bad credit can not.