How Should You Proceed If You Have No Credit at All?

Credit is a crucial aspect of your financial life. A strong credit history and a good credit score can make securing loans, such as a mortgage, car loan, or credit card, much easier and more affordable. Your credit history and score also determine the terms and interest rates you receive, with better credit typically leading to more favorable conditions. However, not everyone has great credit; some people don’t have any credit at all.

According to the major credit bureaus—Experian, TransUnion, and Equifax—26 million Americans currently have no credit history or score to evaluate. This lack of credit can be a significant barrier when trying to get your finances on track. Without a credit history, you may struggle to qualify for loans, mortgages, or even credit cards. So, what can you do?

Building credit can be complex and time-consuming. It’s a classic chicken-or-egg scenario: to get credit, you need a credit history, but you can’t build a credit history without getting credit. This apparent contradiction can be frustrating.

Many people don’t realize that you can actually report your rent and utility payments to certain credit bureaus. These payments can help you build a consistent and positive credit history, as timely bill payments demonstrate financial reliability—an essential factor in building credit.

More importantly, reporting these payments can help you establish a credit history, which can be instrumental in securing additional credit in the future. On-time payments for utilities can also contribute to a positive credit score. Check with your phone, water, electric, gas, and cable companies to see if they can report your payments to credit bureaus. It’s a smart and straightforward way to start building your credit history from scratch.

While you may lack a credit history, there’s a good chance someone in your circle has one. Whether it’s a relative, close friend, or trusted neighbor, having a co-signer can help you secure a credit card, line of credit, or other loans.

It’s important to understand that a co-signer assumes financial responsibility for you if they agree to co-sign. They pledge to repay any debts if you default on payments. Therefore, this isn’t a favor to ask of just anyone, nor should it be viewed as a safety net for yourself in case of financial hardship.

However, if you can find someone you trust implicitly, securing a co-signer can be one of the most efficient ways to access credit quickly. Keep in mind that not all forms of credit accept co-signers—many credit cards, for instance, do not. Therefore, be sure to thoroughly research your options before approaching anyone for co-signature.

Another method to leverage someone else’s positive credit history is by becoming an “authorized user” on their credit card. Typically, this individual is a family member like a parent or sibling, who possesses a solid credit history and a high credit score. By adding you as an authorized user on their credit card, you gain permission to use the card while the primary cardholder remains responsible for the monthly payments.

The advantage here is that credit reporting bureaus will recognize your association with a credit account that’s in good standing. Even if you refrain from using the card, being an authorized user initiates the process of building your credit history. However, if you do decide to use the card, ensure you arrange to pay off your balances promptly. It’s technically possible to pursue this route with a stranger, but there’s considerable risk involved. Though not illegal, it’s a practice we strongly advise against due to its inherent sketchiness.

Student credit cards serve as a pathway for young adults to kickstart their credit journey. Despite their less-than-ideal terms, these cards typically approve nearly all applicants, offering a head start in building credit even before entering the workforce.

These cards often come with stricter conditions compared to other credit card types, such as lower credit limits, higher interest rates, and minimal rewards or points. However, for young individuals seeking to establish their credit profile, a student credit card can be a viable option.

In many instances, it might be the sole option available for obtaining a credit card initially. Nevertheless, exercising caution is paramount. Any credit card demands responsible management, especially for the young and financially inexperienced. It’s crucial to avoid impulsive spending and ensure prompt payment of balances in full each month to evade accumulating interest charges.

A “credit-builder loan” is a specialized bank loan designed to facilitate the establishment of a credit history. However, it operates differently from conventional loans, so it’s crucial to understand its mechanics thoroughly before proceeding. Typically, the borrowed funds are placed in a locked account by the bank. You then make regular payments on the loan amount until it’s fully repaid. Upon completion of the payments, the locked funds are released to you, often in predetermined stages, such as 25% or 50% of the total amount.

While this may seem like a convoluted method of saving money, it effectively serves to bolster your credit profile. Despite essentially using your own funds, credit-builder loans fulfill their promise of enhancing your creditworthiness by reporting your payments to credit bureaus. Credit unions and community banks are more likely to offer these loans than mainstream banks.

It’s essential to exercise caution, as some financial institutions may offer credit-builder loans with unfavorable terms. While there may be better options for saving toward significant purchases, credit-builder loans can be beneficial if you’re eager to establish a solid credit foundation.

Retailers such as department stores and gas stations often provide branded credit cards that are exclusively valid at their establishments. These cards, like the erstwhile Sears card, were once prevalent. They are typically accessible to individuals with limited or no credit history, featuring modest credit limits and elevated interest rates. Nonetheless, when handled responsibly, these store credit cards can aid in establishing a credit history.

It’s imperative to exercise restraint and treat these cards like cash. Avoid overspending beyond what you would with physical currency. Additionally, ensure that you settle the entire balance each month. Furthermore, inquire whether the store reports your credit activity to the credit bureaus, as this is essential for it to positively impact your credit history.

A secured credit card necessitates an initial security deposit, typically equivalent to the card’s entire limit. With a deposit, typically around $500 to $1,000, you can secure such a card. In the event of non-payment, the bank can utilize this deposit. As the deposit aligns with the credit limit, the lender faces minimal risk.

While these cards may not facilitate substantial purchases, they serve to bolster your credit. Utilize them judiciously, perhaps for routine expenses like fuel or online purchases, and promptly settle the balance to preserve the security deposit. Over time, this responsible behavior contributes to a favorable credit history and an elevated score.

Many secured cards transition into regular credit cards after a fixed term, typically 12 to 24 months. At this juncture, the security deposit is often refunded, transforming the card into a conventional credit card. Continued responsible usage can lead to enhanced credit limits and reduced interest rates.