Your credit history is one of the most important aspects of your personal finances, affecting everything from your loan interest rates and eligibility to whether you can rent an apartment. Unfortunately, it can be challenging to build credit when you have none.
If you're starting from square one with a slim credit history—or no credit history at all—you're not out of luck. There are several steps you can take to improve your credit history, even without easy access to certain sources of credit.
Key Takeaways
- Your credit history is a comprehensive summary of your past borrowing, which is recorded in your credit report.
- Credit history directly affects credit score, as well as the ability to qualify for new credit, interest rates on new credit, and more.
- Before taking action to build credit, review your credit report to check for errors that could be hurting you.
- There are many ways to build credit history when you have none, including using secured credit cards, becoming an authorized user, and more.
- Once you've built up your credit history, it's important to maintain it by using loans and credit cards responsibly and making your monthly bill payments.
What Is Credit History?
Your credit history is a comprehensive summary of your past borrowing, including loans and credit cards.
"Imagine every time you borrow money, like taking a loan or using a credit card, it's like taking a test," says Christopher Naghibi, the Chief Operating Officer and former Chief Credit Officer at First Foundation Bank. "The way you handle this—paying back on time, how much you borrow, how often you borrow—are all recorded. This record is your credit history."
Your credit history is recorded in your credit report, which includes:
- Number and types of your credit accounts
- How long each account has been open
- Amounts owed
- Amount of available credit used
- Whether bills have been paid on time
- Number of recent credit inquiries
The information in your credit history makes up your credit score. Lenders use these two factors to ascertain your ability to repay debts, and they use them when determining loan eligibility and interest rates. What's more, your credit history could impact your ability to rent an apartment, your ability to get insurance and the rates you're quoted, and more.
Review Your Credit Report
Before taking steps to build your credit, make sure that you understand your credit history by getting a free copy of your credit report at AnnualCreditReport.com. You may be surprised to discover you already have a credit history. This is likely the case if you've borrowed student loans or, unfortunately, have ever missed a bill payment in the past.
Federal law guarantees each person the ability to get a free copy of each of their credit reports—one from each of the three major credit bureaus: Equifax, Experian, and TransUnion—once per year. However, since 2020, AnnualCreditReport.com has offered free weekly credit reports.
Knowing the contents of your credit report is invaluable when you're working to build your credit. First, it will give you an idea of where you're starting from. Additionally, it can help you learn if there are any errors on your credit report.
A 2013 study by the Federal Trade Commission found that roughly one in five consumers—that's 20%—had an error on at least one of their credit reports. And a more recent study by Consumer Reports found the number to be as high as 34%.
Unfortunately, these errors could harm your credit score and make it more difficult for you to access credit. You can dispute these errors with the three credit bureaus to ensure that any incorrect information is removed from your credit report.
Tip
Once you start taking steps to build your credit, consider checking your credit reports frequently so you can review your progress. You can even set up an account with a credit monitoring app to be notified of changes in your credit score or additions to your credit report.
How To Build a Credit History
It's normal to have no credit history when you're young, but it can also hold you back from accessing new credit in the future. It may not seem like a big deal now, but if you eventually hope to buy a home, finance a vehicle, or even take advantage of a rewards credit card, you'll need a credit history to show. Let's talk about some of the best ways to build one.
Apply for a Secured Credit Card
With no credit history, you might qualify for a secured credit card. A secured card requires you to keep a certain amount of money on deposit, which then serves as the credit limit on your card.
Your credit limit on a secured credit card may not be very high—they often start at just a couple hundred dollars—but it will get you started toward a credit history.
If you've been approved for a secured credit card, use it strategically to build your credit while avoiding interest payments.
"Make small purchases and pay the bill in full each month," says Naghibi. "This demonstrates responsible credit use and builds history."
Once you've established a good track record with that card, you may be able to increase your credit limit without having to pay an additional security deposit or, ideally, upgrade to an unsecured credit card.
Become an Authorized User
If you have a spouse, parent, or someone else with a credit card and good credit history, check if they are willing to add you as an authorized user on their account. This way, you can build your credit history as they make regular payments on that card.
"Being added to a family member's credit card account can help bolster your score in the near term while you are building your own," says Naghibi. "You get a card, but the primary account holder is responsible for the bill. Their good credit habits can reflect positively on your credit history."
Adding an authorized user to a card is a risk to the cardholder. If they include you as a user, they may not want you to actually use the card if they have concerns about how you will spend and whether you will repay them. Likewise, being an authorized user can also be a risk for you if the primary cardholder doesn't pay their monthly bill or carries a large balance.
Find a Co-Signer
Similar to becoming an authorized user on someone else's card, finding a co-signer allows you to benefit from someone else's good credit history. When you apply for a loan, many lenders give you the option of adding a co-signer. When you do this, the lender uses the co-signers credit history and income as well as your own to determine your eligibility.
However, proceed with caution if you use a co-signer. If you miss payments on your loan, it's not just you that's negatively affected. Those missed payments also show up on your co-signer's credit reports and negatively impact their credit. And if you default on the loan, the lender could go after your co-signer for repayment.
Because of that, you should only ask someone to co-sign a loan when you're confident you can repay it.
Use Store Credit Cards
"Okay, so this is unorthodox advice, but I am going to go ahead and give it," says Naghibi. "Retail store cards and gas credit cards are often easier to get than regular credit cards."
Store credit cards, offered by major retailers, may have more lenient approval requirements. These cards often come with an account-opening bonus, such as 10% off your first purchase.
Consider taking advantage of a credit card if you frequently make purchases from that retailer. However, use the card for small purchases and repay your balance each month.
Warning
Store credit cards have interest rates that are higher than other types of cards, making it easier to rack up debt and get stuck in a hole you can't get out of.
Finance With Interest-Free Offers
Many retailers will allow you to purchase items on credit with loans that have no interest for a set period of time—usually 90 days. These programs often report your payments to credit bureaus, which will help you establish credit.
Make sure to read the terms and conditions of these offers. First, they aren't always reported to the credit bureaus, meaning there may not be a credit score benefit. For example, buy now, pay later apps sometimes only report longer-term loans to credit bureaus.
To avoid paying interest or hidden fees, make sure to pay it off completely before the allotted period expires. Keep in mind that if you don't make payments on time, your credit can be negatively affected.
Apply for a Credit-Builder Loan
A credit-builder loan is similar to a secured loan or credit card, where an upfront deposit secures your loan balance. When you apply for and are approved for the loan, the money is deposited into a savings account on your behalf.
You'll repay your credit builder loan over time, just as you would any other personal loan. And once the loan is fully repaid, you'll receive the money in the savings account. In most cases, your credit will have improved thanks to an additional account on your credit report and the months or years of on-time payment history.
Get Credit for Your Monthly Bills
Unfortunately, many of the bills you pay each month, such as your rent and utilities, don't help boost your credit even though they show a responsible payment history. The good news is there are services you can sign up for that will add these payments to your credit report.
First, Experian Boost is a popular service that adds your rent, insurance, utilities, and cell phone payments to your Experian credit report for free. However, they won't be added to your Equifax or TransUnion credit reports, meaning they won't necessarily help you qualify for credit.
There are also paid services that will report your monthly bill payments to two or more credit bureaus.
How To Use Credit Once You Have It
Once you've built good credit, you need to use it responsibly to maintain it. To do that, you'll need to pay your bills on time, avoid applying for too many forms of credit in a short time frame, and keep your credit utilization ratio low by spending well below your limit.
It's important to know that something that feels like a relatively minor offense could undo much of the work you've done to build your credit.
For example, according to the Fair Isaac Corporation, the creator of the FICO score, someone with good credit could see their score drop by 60 or more points for missing a payment by 30 days and by 110 or more points for missing a payment for 90 days. Additionally, maxing out your credit cards could cause your score to drop by more than 100 points.
Setting up autopay can help you ensure that you make payments on time. Paying off your balances each month can save you a significant amount of money in interest.
The length of time that your accounts have been open is also factored into your credit history. The longer you have had credit, the less of a risk you are to lenders. So, keeping a credit card account open can help improve your credit score even if you do not use a credit card.
Additionally, once you have good credit, consider how you can use it to your advantage. For example, could you apply for a rewards credit card to help you earn travel points or cash back on your spending? There are more financial doors open to those with good credit—you just have to know where you look.
How Do Student Credit Cards Work?
Major lenders like Bank of America, Discover, and Capital One offer student credit cards. If you are a student, they are a great option to build credit. They usually offer lower interest rates and offer credit to people with no existing credit history. Sometimes, they also offer sign-up bonuses, which will pay you a certain amount of points you can use for a vacation or cash back.
Does Paying Off My Credit Card Each Month Hurt My Score?
Paying your credit card in full every month will not hurt your credit score. Instead, paying your credit card off in full every month saves you from spending money on interest and can actually help your score by decreasing your credit utilization ratio.
What Is the Easiest Way to Establish Credit History?
One of the easiest ways to establish a credit history is to be added as an authorized user to someone else's account if they have an excellent history. Getting a secured credit card or a credit card through your bank is another easy way to build credit.
The Bottom Line
You can take several steps to start to build a good credit history, from getting a secured credit card to responsibly using a retailer's line of credit. Having a strong credit score will improve your chances of getting approved for financial products like mortgages, auto loans, personal loans, and credit cards. With better credit, you can also get better interest rates, which will save you money in the long term.
