No Credit? How to Build it From the Ground Up

Woman hand holding credit cards and using smartphone for shopping online with payment on internet banking

Having poor credit isn’t a good thing, but neither is having no credit at all. Getting approved for a mortgage – or any other type of loan, for that matter – is pretty much an impossible feat if the lender has nothing to go on. How will your lender know if you’ll be good for the money if you don’t have a history of responsible repayment? While you may be avoiding debt like the plague, you’re also failing to build up any sort of credit whatsoever.

If you currently have no credit, here are a few ways to build it up from scratch.

Apply For a Secured Credit Card

You may have been paying for everything in cash up to now, but it’s time to get some credit on the books, and you can easily start by applying for a secured credit card. These types of credit cards are backed by a cash deposit that you make upfront, which essentially acts as your credit limit. That means you must have money in your account equivalent to your credit line. If you want to spend $500 on your card, for example, you need $500 in your account to cover that amount.

Like a typical credit card, monthly payments are made, and interest is incurred if you don’t pay your balance off in full and on time. Every purchase you make with the card is deducted from your remaining balance. That initial $500 stays as is, and is used as collateral if you don’t make your payments.

Using a secured credit card will help you build up enough credit to be eligible for a traditional credit card.

Take Out a Loan With a Credible Co-Signer

You likely won’t be approved for a loan on your own without any credit, but you have a good chance of approval if you can get a co-signer on your loan application. The key is to make sure that the co-signer already has excellent credit. Basically, the co-signer agrees to cover the loan amount in the event that you don’t make your payments. That’s the guarantee that a lender would get with a co-signer.

By taking out a small loan in this manner, you’ll have an opportunity to prove your ability to make regular payments in full and on time. Just make sure you’ve got the income and the discipline necessary to comfortably make your loan payments, or you’ll be putting your co-signer in a very precarious position.

Add Yourself as an Authorized User on Another Person’s Credit Card

Ask a close friend or family member if they would be willing to allow you to be added as an authorized user on his or her credit card. This will allow you to use that person’s credit card without being legally responsible to pay for the charges, and you’ll be building credit at the same time. The other person really needs to have full trust in you, so make sure you’re up for the task before you ask and agree to put your name down as an authorized user.

Before you take this route, however, you should first make sure that the credit card company sends authorized user activity information to the credit bureaus. If it doesn’t, there’s no point continuing with this option.

Apply For a Credit Builder Loan

This type of loan is specifically designed to help people build credit, as all payment activity is reported to the credit bureaus. They are small loans made by some credit unions and community banks which basically act as a type of forced savings.

The money borrowed is deposited in a savings account by the lender, and can’t be accessed until you fully repay the loan. Once the loan term expires, you get the money, as well as a good credit score.

The Bottom Line

The key here is to make sure the credit you build is a good one. Be sure to make all payments on time and in full, and keep your credit card debt low. Don’t open too many accounts within a short period of time, and get a copy of your credit report once a year to see if there are any mistakes or discrepancies on there that could be bringing you credit score down. There’s no point in trying to build credit if you’re just going to be irresponsible with your efforts. A bad credit score is just as bad as no credit at all.