At The Gym we work with a lot of people who are focused on building credit. Some people are recent grads who are transitioning from school to full time work and becoming financially independent from their families. Some people were scared of debt in the past and avoided getting cards until they realized that having credit is necessary for most of us, and that having credit typically involves having credit cards. Others are new to the U.S., just got a social security number, and are establishing a new financial life in a new place. Whatever the reason, the process can be less than intuitive, and having a checklist to follow as you move forward can be helpful.
Today we’re going back to basics to answer one of the most common questions we see: how do you establish credit when you have none?
Pull your credit report and consider signing up for a credit monitoring service like Credit Karma.
Even if you haven’t had a credit card or loan before, it’s important to pull your credit report and know what’s there. Unfortunately, fraud does happen, so you want to be sure that anything on the report is your doing. Also unfortunately, despite the fact that things like on-time payments to utilities do not count towards a good credit score, anything that has gone unpaid and into collections DOES get figured into it, and can impact your credit for years to come. This can happen without you knowing it, so if credit building is your goal, you have to get in the know.
2. Make sure you have bills in your name
I know I just said that paying bills on time doesn’t count towards a good credit score, but they do figure into alternative credit scoring, such as your FICO or Vantage scores, and sometimes utility companies look for a history of past utility payments to determine whether you qualify for an account. On top of that, they can come in handy for other financial considerations, like proving that you are in a domestic partnership and getting covered under a partner’s health insurance.
3. Sign up for Experian Boost
The way Experian Boost works is that, like lots of other financial apps, you link your bank and credit cards accounts to it and it tracks your payments for things like utilities and subscriptions (and even your Netflix account). This helps to boost your FICO score, although it’s worth mentioning that lenders who only look at Transunion or Experian may not see this.
4. Become an authorized user on a credit card whose owner has excellent credit
A trick that financially savvy parents know is that if they add their child to their cards, their child can piggyback on their good credit score and develop a longer credit history. Even if your parents didn’t do this early on, it’s not too late. If you are moving out of your parents’ house or otherwise developing financial independence, see if you can be added as an authorized user. The caveat is that if the person doesn’t have excellent credit it won’t help you, and if their credit dips or they increase their utilization, it will hurt you.
5. Get a secured credit card
If you have no credit or bad credit, a secured credit card can help you start from the ground up. Since you don’t have a long credit history or a high score to back you up, you’ll put down a deposit to secure your credit limit and then when you charge something on your card, your deposit will serve as collateral. If you use the card and put a small recurring charge on it and pay it off every month, you can demonstrate creditworthiness without ever paying interest and move on to cards with more benefits.
6. Use a tool like Card Match to see what credit cards you are pre approved for
I know a lot of people have been scared away from credit cards, for good reason. We’ve all seen the downsides of consumer debt. But credit cards are a pretty non-negotiable part of your overall financial wellness and also necessary for things like hotel room deposits and renting cards. Just because you have a credit line doesn’t mean you have to use it, and there’s nothing stopping you from reaping the rewards of credit cards and paying the statement off each month.
Starting from scratch can be hard, but if you know your way, the road doesn’t have to be long. Follow these steps, put one foot in front of the other, and before you know it you’ll have made strides towards a healthy score.