About 45 million Americans have little to no credit history, according to Lending Tree. That makes it less likely that they can get approval for a car loan or an apartment.
Often, these big life steps require a credit check. With little to no credit, you may have to pay a higher security deposit, find a guarantor or search for a no-credit-check apartment. And purchasing a car may mean a higher down payment, getting a cosigner or paying in cash. All of those options can be inconvenient or may not be possible for a recent college graduate.
If you’re not in a rush to make a big purchase or to live on your own, it’s worth taking the time to build your credit today. Here are three ways to get started:
Become an authorized user
Think of being an authorized user as the training wheels of credit. It will allow you to build your credit with the help of someone else and introduce you to the basics of credit. When a parent, guardian or someone you trust — and who trusts you — adds you as an authorized user, you will receive a credit card with your name on it in the mail.
Often, parents may opt to keep the card tucked away for a few years before letting their child use the card. But once it is put in your hands, it can be used as a credit-building tool or for emergencies. This option is good because once you are ready to apply for your own credit card, you’ll have a credit history to increase your chances of approval.
As a senior in high school, I was added as an authorized user to one of my parent’s credit cards. Once it was time to apply for my first credit card as a sophomore in college, I already had an established line of credit and was immediately approved.
Based on my experience, my number one piece of advice is to become an authorized user as soon as possible if someone is willing to help.
Apply for a starter credit card
There are many starter credit cards with little to no credit history requirements. I’d recommend student cards, secured cards and cash-back rewards cards.
A student credit card is the easiest card for a college student to be approved for. We recommend the Journey Student Rewards from Capital One card. This card is a valuable tool for earning rewards. With this card, you can monitor your credit profile with unlimited access to your credit score and automatically be considered for a higher credit line in just six months.
Next is a secured credit card if you have less than perfect credit. This card is backed by a cash deposit that will serve as collateral on the account. That means the issuer has extra security if the cardholder cannot make a payment.
Finally, opening a cash-back credit card will allow you to receive a percentage of the money that you spend back, similar to a discount or coupon.
Responsibly using a credit card is a vital part of maintaining good credit. Once you receive your first card, your payment history will make up for 35% of your FICO score. According to Lending Tree, if you are more than 30 days late on a credit card payment, your credit score can drop by as much as 180 points and may stay on your credit report for up to seven years, which can make it even harder to get approved for a home or car loan.
As a result of three years of on-time payments and keeping my credit card balances low, I have been able to build my credit. It was no hassle to be approved for a car loan and an apartment without paying a security deposit or needing a cosigner.
Investigate alternative ways to build credit
I know how overwhelming it can be trying to navigate building your credit. For some, obtaining a credit card or becoming an authorized user on a parent’s card is off the table. Fortunately, there are other options:
Consider applying for a credit builder loan. These are low-risk loans that are easy to qualify for with no credit history. Furthermore, all payments made with this loan are reported to Equifax, Experian and TransUnion.
If you are a frequent online shopper, using buy now, pay later point-of-sale installment loans can be an option for building credit. When making a purchase, you can pay in four or more interest-free installments. While these services have their benefits, a con is that you risk being charged a late fee if you miss a payment. I have experience using BNPL but prefer to refrain from making online shopping purchases unless I can pay for them in full.
Lastly, services like Experian Boost can help boost your FICO credit score by tracking your monthly phone and utility payments. To use this service, you will need to show three months of payments within the past six months. Using this service will do more than increase your FICO score right now – it will also build your credit in the long run. And after securing your first apartment, you can also use your rent payments to boost your score.
Even though you don’t need a credit score to get an apartment or car loan, not having one can make the application process harder.
Understand that credit is used for many things in adult life, so having a credit score that falls in the good range will improve your approval odds.
With responsible credit practice, you’ll be on the road to getting your next place to live or car before you know it.