In today’s world, so many things are paid for using debt, ranging from mortgages and cars to smartphones and student tuition. Having a good credit score is one of the best things you can do to ensure you get reasonable interest rates on any large purchases in the future. However, no one is born with a good credit score. Credit scores must be built from the ground up.
Traditional credit cards typically require a decent credit score to get approval, so if you don’t have a score, how will you begin? Simultaneously, these credit cards are also a notorious trap that can very easily lure you into a vicious cycle of debt and high-interest credit card payments. So what is a young person who wants to establish credit to do?
The good news is there are some options for building a credit score from scratch without applying for any new unsecured credit cards.
1. Take Out a Personal Loan
A personal loan is a form of debt commonly referred to as unsecured debt. This type of loan is not backed by any form of collateral, such as a car or house. Because of this inherently higher risk, lenders will typically charge a higher interest rate to mitigate their risk.
If you have no credit score or a very low one, you may need to get someone to cosign this loan with you. It would need to be someone you trust and who can trust you because that person would be liable if you were to default (not repay) or miss payments. Please be very responsible and appreciate the risk the cosigner is taking on for you.
You can use a personal loan for almost anything, ranging from buying a computer or appliance to a used car or home improvement renovation. As with any form of credit, remember that this is debt that needs to be repaid. You should only take out a loan if you have a legitimate use for it, and never to add diversity to your credit report.
2. Try a CD Loan
Passbook or CD (Certificate of Deposit) loans are relatively easy to secure, even if you lack a high credit score. You will need to use whatever savings you have or use a CD account to take out the loan. Those savings or that CD will then be collateral against the loan. If you default on it, the bank can seize the collateral as its payment. This is why the loan is easier to get; the bank lacks the risk associated with unsecured personal loans like the ones described above.
3. Make Rent Payments on Time
This option is interesting and unusual because few people have considered or even know about it. Most landlords do not report rent payments to any credit bureaus. You might be able to ask them if they do, and if not, to consider doing so. However, they may not be willing to invest the time. Thankfully, there is a service that reports rent payments on your behalf so that you can build your credit score.
RentTrack is a service that helps renters improve their credit score and credit history simply by paying their rent on time each month.
To use it, you sign up, answer a few questions, and verify your identity. Then you pay RentTrack, who processes your payment and relays it to your landlord on your behalf. They can either mail a paper check or make a direct deposit for you. All payments are guaranteed to arrive on time, and a confirmation of receipt is logged so you can make sure it was received. You can access and verify this payment receipt information if you have a landlord who is not great at keeping accurate records.
Now, here’s the best part: tenants who use RentTrack have reported that their credit score increased by 29 points on average in just the first two months of using the service, and by a gigantic 132 points after two full years. This increase is unparalleled. You would have a tough time creating this much of a credit score boost using any other means. Considering most people’s credit scores range from about 550 to 850, a move of 132 points is a massive shift in that window!
4. Pay Your Federal Student Loans on Time
Student loan repayments are automatically logged and reported to all three major credit bureaus. If you have used student loans to pay for college, you already have a significant way to build your credit score by paying them back on time. One of the (few) upsides to student loans is that you don’t need to have a good credit score to get approved for one. You can use a student loan to build a credit score from scratch, although this alone wouldn’t be a good reason to get one. But, if you already need one to pay for school, it’s a nice silver lining.
5. Become an Authorized User on a Friend’s Credit Card Account
One of the easiest ways to build credit is to get added onto a friend’s account as an authorized user. You would get a credit card with your name on it and connected to your friend’s credit card account. They will ultimately be responsible if you don’t pay your credit card bills on time, so you will need to be extremely careful and responsible when using this method to build your credit.
You will also need to make sure that whatever friend you join on with is also accountable. Just as you can hurt their credit score by not paying your bills on time, they can hurt yours if they are not responsible. This is a mutual arrangement where you both need to watch out for and respect one another. If handled responsibly, it can be useful as a means of building your credit score up from scratch.
6. Use a Peer Lender Loan
A peer lender loan is a type of loan that reports payments to the credit bureaus. The downside of using a peer lender loan is that the interest rates tend to be relatively high, so you probably won’t want to use this type of loan unless you have not been able to succeed with the other options on this list. You do get access to higher limits than other types of loans, however, making them work for larger purchases.
7. Get a Secured Credit Card
A secured credit card works like a debit card. You supply an up-front security deposit, which becomes your credit limit. If you provide $500, your credit limit will be $500. If you ever fail to pay your credit card bill, the credit card company will keep your security deposit. However, this would not be good for your credit score!
You can use a secured credit card to build your credit score from scratch because the lender takes on no risk thanks to your security deposit. They do report on-time payments to the major credit bureaus, which builds your credit score. You can often raise your credit limit by sending in more money to add to your deposit amount. Eventually, once you’ve built your credit score up enough, you can apply for an unsecured credit card, should you so desire.
Do you have any additional tips for building a credit score? Be sure to share them below!