If your credit history isn’t long enough, lenders may view it as “insufficient” and you may have trouble qualifying for a credit card or other loan. And that’s where the challenge begins. Lenders don’t want to give you credit when you don’t have a credit history, but it’s hard to build a credit history when you can’t get credit.
The best way to establish a good credit history is slowly, over time. Make payments on time. Pay off balances as you go, or at least keep them reasonably low. As the years go by, all your responsible behavior can help you build a good credit history.
You say you can’t wait to get started? Okay, here are some things you can do now.
Consider a secured credit card.
Consider any fees and charges when deciding between secured cards. And be sure the card you choose reports your account activity to the major credit bureaus including TransUnion®. Not all cards do this, so you want one that highlights your great track record.
Ask about credit where you bank, shop or get gas.
If you already have a savings or checking account, your bank may approve you for a card with a low credit limit.
You can also try applying for a gas credit card or store credit card. These usually have smaller credit limits, but it’s often easier to qualify for them. Gas credit cards are usually good at only one chain of gas stations, but you can take advantage of discounts and perks. Store credit cards are also limited, but they often offer rewards like cash back, points for certain purchases, or benefits like free shipping.
Talk to lenders before you apply.
For people without long credit histories, some lenders may examine data from less traditional sources, like utility or rental payments. If your credit history is relatively brief, it’s perfectly appropriate to ask your lender if they’ll look at alternative data when they’re considering your application. Just do it before you apply–asking after you’ve been denied may be less effective.
Look into a credit builder loan.
This works on the same principle as a secured credit card, except it’s a loan.
Here’s an example of how it works. Let’s say you take out a small loan from a bank and then use that loan to open one of their Certificates of Deposit (CDs). The bank holds the CD, while you make regular payments on the loan. When you’ve paid off your loan, you own the CD. You end up with some savings, plus a good credit track record.
The downside? Any interest and fees you have to pay on the loan. Be sure you choose a lender that will report your on-time payments to the three major credit bureaus. And try to find a bank that offers low rates and fees.
Become an authorized user.
You can ask someone (usually a family member or close friend) to add you as an authorized user on their credit card. That way, the account’s history will be added to your credit report.
Of course, you’ll want to choose a person whose account is in good standing. There’s always the risk that he or she could miss payments, end up in collections, or even go bankrupt. In that case, their bad behavior could hurt your credit report. So, if you do become an authorized user, monitor your credit report to be sure there are no issues and payments are being made on time.
Don’t apply for multiple credit cards within too short of a time frame.
Applying for lots of credit cards all at once may seem like a good way to kickstart your credit history, but it can actually hurt your credit and raise alarm bells for card issuers. Be selective. Look for the best rates from brands you know.
Be careful about closing accounts.
Closing credit accounts may significantly shorten your credit history. Accounts you close will eventually stop appearing in your credit reports and won’t be calculated in your credit score. Here’s an example. Let’s say you have two credit cards: one with a $20,000 credit limit and zero balance and another card with a $10,000 limit and a $5,000 balance. If you decide to close the $20,000 limit card because you no longer use it, this may negatively affect your utilization ratio (the amount of debt you’re using compared to the amount you have available), your credit score and your credit history. So unless a card has high fees, consider leaving it open. Make a few small purchases every so often and pay them off monthly.
At TransUnion, we believe in Information for Good. Whether it’s creating web-based financial products or sharing expert tips, insights and news on our blog, our mission remains the same: putting powerful tools and resources in your hands to help you know your credit, protect your identity and more effectively manage your financial picture.