People often say it takes credit to build credit. Without a credit history or credit card, it can be difficult to get a credit card, personal loan, or mortgage. So, how do you build a credit history and establish a credit score when you are starting from scratch?
We spoke with our team here at Safely Finance and collected 5 ideas on how to build credit from scratch. All these ideas are relatively straightforward. Your path to building credit will be unique but, if you are just starting out, you can consider one of these options.
Secured credit cards offer one option for building credit from scratch. When you sign up for a secured credit card, you deposit some money with a lender. Then, you can charge up to that same amount on the card. For example, you can deposit $500 with a lender and then you can charge up to $500 on the card you receive from that lender.
Secured credit cards differ from standard credit cards in one key way. Because the lender takes your cash deposit as collateral, the lender takes very little risk lending to you. If you miss a payment or default on your secured card, the cash will cover your debt. When you close your secured credit card, the lender usually returns your cash deposit to you. Standard credit cards do not require a deposit. Both types of cards report your payments to credit bureaus to help you build credit history.
Many lenders offer specific loans designed to help new borrowers establish credit. These loans are often called credit builder loans. The loans work very similarly to a secured credit card. The key difference is that these loans do not have a card. You borrow a set amount and pay it back in full over time with installments. Like a secured credit card, though, credit builder loans require an upfront cash deposit.
Credit builder loans often return your money with interest. The catch is that you will only receive the full amount back if you make on-time payments consistently throughout the term of the loan. You can think of it as the lender helping you borrow money from yourself. In return, they may take a fee but will also report your payments to credit bureaus to build your credit history.
Another option for building credit is to find someone willing to cosign a credit card or loan application with you. A cosigner with good credit history essentially vouches for you. With a cosigner, a lender may be more likely to approve your application. If your cosigner has good credit, you may also receive a lower interest rate than you could on your own. So, in short, try to pick a cosigner with good credit history.
Your best chances of finding a good cosigner could be a parent, grandparent, or sibling. You should let your cosigner know about the potential risks. If either of you fail to make a payment, the negative impact affects both of your credit histories and credit scores. In the worst-case scenario, your cosigner could be stuck paying the entire debt back if you are unable to make your payments.
Some lenders offer special credit cards designed for college students. If you are a college student, you can go online and explore options with banks and credit unions. Student credit cards often have lower fees and interest rates than other credit products designed to help folks build credit. Some student cards even offer rewards. Regardless of the type of card you choose, still make sure to pay on time each month to help you establish good credit history and a strong credit score.
Working directly with renters, Safely Finance offers an effortless way to build credit history without taking on new debt. Renters can build or rebuild credit using their existing rent payments. Safely Finance reports your rent payments to credit bureaus to help you build credit history. You do not need to do anything else beyond signing up. Just visit our website at https://www.safelyfinance.co/rent-reporting.