Common sense would say that having no credit history is a good thing. It means you’ve always been able to afford the things you needed from the money you had, so you didn’t have to borrow. However, if you have no credit history, getting your first line of credit or a loan can be very difficult. And many simple and mundane things like buying a smartphone on a plan functions based on credit.
In the United States, some twenty-six million people are what is called “credit invisible,” and another nineteen million are unscorable according to the data from the Consumer Financial Protection Bureau. That’s forty-two million people who will have few options when they need to get credit. If you’re one of them, you should find ways to build good credit even before you think you need it.
Building Good Credit with Credit Cards
You can’t be blamed for preferring paper over plastic. Cash is still the number one method of payment in the United States, even though the credit card companies are always trying to expand their usage. But if you’re looking for ways to build good credit, you might want to reconsider your preference for paper and give plastic a chance.
The way you start building credit with credit cards is by choosing carefully which type of credit card you get. You should aim for a secured credit card, a type of credit card that uses a cash deposit as collateral. Student credit cards will work well if you’re a student. If you like to shop at certain store chains, you could inquire about their credit card program.
Keep in mind that you can quickly get yourself in trouble using credit cards, and student and shop credit card are known for their high interest rates. So use these cards carefully, and ensure that you make all the payments in full and on time. The credit cards you get should ideally report to the three major credit reporting agencies. If you can’t get a credit card, see if someone can authorize you to use theirs, or be a cosigner for yours.
Using Different Types of Loans to Build Credit
Some loans are relatively easy to get even if you’re credit invisible. For example, there are some loans bad credit owners can access that might help you build good credit. However, having no credit score will attract high interest rates just like having a bad credit score does.
If you’re a college student and you have a student loan, the way you repay it will affect your credit scores. If you bought a car using an auto loan, it will also influence your credit scores. And just as you can apply for a secured credit card, you can also apply for a secured loan. They aren’t called “credit-builder loans” for no reason.
Your ability to pay off the loans will count for your credit score. If credit-building is your goal, you should only get a loan you’ll certainly be able to pay off in time. And if you’re having trouble getting a loan, having someone cosign it with you will go a long way.
Alternative Ways to Build Good Credit
There are many different things that can go towards building your credit. Companies are turning to the use of alternative data to get a better insight into their customers and their ability to pay off loans. This practice is mostly aimed at helping individuals with low incomes to get a credit score, but they generally work for people who are credit-invisible or unscorable.
What type of data is considered an alternative? Your rent-paying habits are one. Your ability to pay your phone bill. In general, alternative data is any type of data that can demonstrate your ability, or a lack thereof, to honor your financial commitments in time. If you’re using alternative data to build a good credit score, all you have to do is pay your bills in time.
It might take some time before you start seeing your credit grow. You should take advantage of your free annual credit report to keep track of how well your credit is coming along. Because you can have one free credit report per company per year, you should check your credit once every four months. And as long as you keep honoring your commitments, you should see your credit score getting better with every report.