Credit cards are some of modern society’s best tools when it comes to managing their finances. It allows for purchases based not only on how much you have in the bank now but on the guarantee of future earnings, meaning you have more freedom to spend when you need to. But if you have no previous credit use in your history, you might have trouble getting a card. You will almost be treated like someone with a bad credit history. It can feel like you’re stuck at the starting line with no way to get off the mark. Without six months of credit activity, many creditors won’t consider you. So, how are you to start making some progress?
Prove your regular income
Credit providers use your history to prove one thing above all else. They want to ensure that you’re able to reliably make payments in the future. That’s it. One of the best ways to prove that is to show that you have income coming in regularly. You can’t use income from other family members or money you have borrowed. If you have a job or any other regular income, it improves your chances of a successful application. The higher your income, the better a card you can expect. Credit lenders ask for income proof on an individual basis, so this information won’t be passed on to credit checking services like Experian.
Prove your use of utilities and services
Credit history isn’t just built through credit cards and loans. It’s built through any pre-arranged, on-going financial transaction. There are a lot of service providers who don’t necessarily need a high credit score but can help you build that credit score. Utility bills like energy, water, and internet. Subscription services like online streaming networks (such as Netflix or Amazon Prime) can help you build your credit as well. Anything that shows you can arrange recurring payments and follow through on them can help establish that score. You just have to make sure you never fall behind. Setting up automatic payments can help with that.
Use your bank overdraft if you can
If you have the room to set up a bank overdraft, consider doing it. An overdraft is a credit arrangement with your bank and depending on your account, you could be entitled to a small overdraft regardless of your current credit score. Banks will often base this decision on income and regular payments like those mentioned in the point above. Students accounts also often get an overdraft attached to them. Even having an overdraft can be good for your credit, but if you can make responsible use of it, all the better. Just make sure you’re fully repaying any money you’ve spent fully and don’t make a habit of treating your overdraft like “free money”. Be responsible with it. An overdraft you fail to pay will do a lot more harm to your credit than good.
Use the rent you pay
If you’re renting accommodation, then that’s great proof that you’re financially responsible. You’re not borrowing, but you are making regular payments on prearranged agreement. These payments don’t appear automatically on your credit reports all the time, but you can use services like Rental Kharma to take a bill you’re paying and add it to your credit report. This is a great first step in building a credit history, as rental agreements are some of the best proof you’re able to pay responsibly.
Applying for credit cards isn’t always the safest way to go about it. If you apply for a card and you get rejected, it actually causes harm to your credit score. They’re what’s known as a “hard credit check”. If one creditor decides you’re not a reliable customer, that shows up to other creditors. Many of them allow you to pre-qualify, however. This is a “soft credit check” meaning it will make no impact on your credit score or history no matter what they decide. If you are pre-approved or pre-qualified, it’s not a guarantee of a successful application, however. Have proof of your income and existing bills and check the qualification standards on the card, carefully. Make sure you are above the income limit, most importantly. If you do get rejected, you will be told why, which gives you a specific factor to work on.
A hard inquiry may impact your credit scores and stay on your credit reports for about two years. By contrast, soft credit inquiries won’t affect your scores. More from Credit Karma »
Balance the books
If you have outstanding loans or you haven’t been keeping up with loan balances, creditors will be hesitant to lend you any more money because it will look like you’re not able to pay what you’ve already borrowed. Even if you’re within the bounds of the agreement with current lenders, make sure you’re paying them back regularly and pay more than the minimum repayments. If you’re uncertain as to whether or not you have any outstanding loans, then get a credit report. There’s also a real danger that there could erroneous loans and credit relationships attached to your name that you should go on to correct.
Find a guarantor
You can’t use your family’s income to build credit, but you can use their credit. For instance, you can use someone with a good credit or a higher income as a co-signer to apply with you. It’s totally legal and aboveboard with creditors, but it does come with some drawbacks. You might not get the best deal on cards. Any failure to pay or irresponsible use with affect both co-signers, too. So, don’t miss any payments and don’t max out the card. Have an agreement with the co-signer beforehand as to who is going to be responsible for the card, how it’s going to be used, and how it’s going to be paid back. Irresponsible use will jeopardize their financial standing, not just yours.
Don’t apply for lots of cards at once
As mentioned, when you apply for a credit card and you get rejected, it causes a hard credit check which can then negatively affect your score. Every time you apply for a credit card, it will show up on your history. Even if you haven’t yet been denied, creditors will look at this and if they see you frantically searching for a card, they might be inclined to believe you’re trying to take on more credit than you can handle. Some will even take it as a sign of fraudulent credit use. Choose credit cards ahead of time, get pre-approved, and know what’s expected of a successful applicant. Take your time.
Use different kinds of cards
There are other cards more broadly available to those with no credit history that can help you to go on to establish some. Students are rarely expected to have a credit history. That’s why there are student credit cards specifically designed for them. If you’re a student, that is your best bet for getting approved. Your spending limit might be lower, but this is about building credit, not about getting the best card immediately. If you’re not a student, secured cards can be a good stepping stone, too. With these cards, you make a security deposit upfront. Just make sure you’re using a card that comes with few fees and one that assures that they report to the major credit bureaus.
Use a store card
If you have any retail stores that you use regularly, it’s a good idea to use one of the cards they have on offer. They’re a common tool for building credit. These are “closed loop” cards, not supported by the large credit card providers and often only able to be used within that store. However, if you use that store often and you’re able to pay back the card reliably and above the minimum payments, they can establish a history in no time. Just do be aware that store cards tend to have low limits and often have higher interest rates than, for instance, secured cards. Don’t make any credit agreements before you already have a strategy as to how you’re going to manage it. Always check the details, most importantly the interest rate, before applying for a card. You want manageable credit, not debt that threatens to spiral out of control.
Join a credit union
Credit union loans are some of the best around. It’s a collection of borrowers and creditors that tend to share some common ground, such as an industry or a local area, that operates on a smaller scale than a bank. It’s usually easier to get approved by a credit union, while it also tends to be easier to pay back because of their relatively low rates and fees. Just make sure you take your time getting to know the credit unions in the area and make sure that you fit their criteria before you join. Much like other borrowers, if you apply and get rejected, it’s likely to hurt your credit score. But most people have at least one credit union they’re almost guaranteed to be able to join so long as you don’t have a negative credit history. Once you make a small deposit, you can apply for a loan and start building credit.
Once you follow the tips above, approval by lenders is almost guaranteed. Just be a responsible and conscientious credit user from now on and keep building that score so you can take advantage of better and better deals in future.