Whether you’re a young adult and have never taken on a loan or credit card, or you just haven’t used credit in a long time, getting your hands on credit when you finally want it can be an incredibly frustrating process — you need a credit history to get credit, but you can’t build that history unless you already have credit.
In the video below, Go Banking Rates managing editor explains how to start building credit from scratch.
Building Credit — Don’ts
Before I describe the best way to start building a credit history, I’ll tell you what not to do so the process doesn’t become more difficult than necessary.
First, don’t keep applying for credit cards – even retail cards. If you’ve been rejected by one creditor for insufficient credit history, chances are, you’re going to be rejected by them all. And every time you apply for another card, your credit score goes down a few points.
Secondly, don’t bother getting a loan with a co-signer for the sake of building credit. This used to work a lot better before the recession, but now lenders are much more insistent you prove that you are financially responsible, and not just your parents or friends. Having a loan co-signed, or being added as an authorized user on someone else’s credit card for that matter, is going to do little-to-nothing to really build your credit history.
Establish Credit with a Secured Card
So what’s the answer? A secured card. Secured credit cards prevent you from getting into debt trouble because you actually provide the cash for your line of “credit” up front. Then when you use the card, you’re basically using up that deposit.
The credit limit will likely be pretty small, but it’s enough to build a credit history because your card activity is usually reported to the three main credit bureaus.
Tips for using a secured card
- Ensure your activity is, in fact, reported to the credit bureaus. Most, but not all, secured cards will do this.
- Always make your payments on time! Missing payments is the easiest way to ruin your credit.
- Don’t max it out. Try to keep your credit utilization ratio under 30 percent for the best results.
- Shop around for a card with low fees. Some charge ridiculous fees that just aren’t worth it.
- Remain patient. It’s going to take six months to a year for a secured card to build up a credit history, so be prepared to wait a while before applying for a real credit card or loan.
One card that does report to the credit bureaus, charges low fees and consistently gets positive reviews from actual account holders is the Orchard Bank Secured Card.
Unfortunately, even though you can easily destroy your credit with just a handful of poor decisions, building up a positive credit history from scratch takes a lot of patience and diligence. However, stick with it and you’ll be glad you did.