How to Establish Credit if You Have None

Credit seems to be a necessity in our country today. Even if you don’t have things like a house or car to pay for, you may still want to establish good credit in case of an emergency. This way you will be able to get funds fast (but please check out past blogs about the importance of a Periodic Savings account!! Not everything is a real emergency – you can save up for things like car repairs, taxes, insurance, etc.). If you don’t have credit and want to establish it, here are some steps you can take to get started:

1. Open a bank account. This is a good starting point. While banks don’t report to the credit bureaus (meaning your account doesn’t show up on your credit report), it can help lenders decide to lend money to you. They can contact the bank (with your permission) to find out if the account is in good standing. Some credit applications have a space for bank account information. It is also a good idea to have bank accounts for managing your money well. At iMoneyCoach we teach about the importance of opening various accounts for managing incoming money, bill payment, periodic savings, as well as long-term savings.
2. Utility bills. Often creditors will look at utility bills to see if you are in good standing and have been paying your bill on time. If you can, make sure to get your utility bill in your name and pay the bill on time every month. Some creditors will look at cell phone bills, although not all will accept them now.
3. Start with a gas card or department store credit card. It can be easier to get a credit card with a gas company or department store than with a big name credit card (i.e. Visa, American Express). Using this card carefully, being sure to pay the full balance on time each month, can help you establish credit by showing that you are faithful to make payments in a timely manner. When you open this kind of card, it is important that you stick to your budget and only spend what you can afford. If you don’t have a budget, be sure to check out some of our other articles on the importance of budgeting. Knowing how to manage your money well when you START building credit can save you from falling into bad credit and having to try to dig yourself out.
4. Secured credit cards. You may have heard of a secured credit card. This is a card that requires you to deposit a certain amount into a bank account – if you don’t make your credit card payment, the bank gets to keep your deposit. These cards can be useful if you are unable to establish credit in other ways, but there are a lot of predators out there who charge high fees and interest for these types of cards. Be sure that if you do get a secured credit card that it reports to at least one of the credit bureaus because it will not show up on your credit report otherwise! Again, before you spend any money with this card, make sure you are budgeting and tracking every penny. Keep a running record of what you earn and spend so you are able to pay that credit card bill in full and on time every month.
5. Major credit card. After several months of using your cards and paying the bill on time, you can apply for a major credit card like a Visa or MasterCard. When you get this card, you will have a bigger credit limit, but only use what you can afford to pay off when the bill comes due. You don’t want to get sucked into carrying debt, especially if your goal is to build up good credit. A good rule to follow is: If you don’t have the money, don’t spend it! Keep track of every purchase you make when you make it so you know what your total bill will be. And make sure to pay it on time. Late payments can have a significant negative effect on your credit rating.

It’s a good idea to get a copy of your credit report (you can get a free copy from one of the three major bureaus – Experian, Transunion, or Equifax – once per year). That way you can see if someone else has been using your ID or if there are outstanding debts that do not belong to you showing up on your credit report. For other tips and ideas about establishing credit, you can contact iMoneyCoach. Just because it seems to be the norm now for people to live in debt or have bad credit, it doesn’t mean that YOU can’t build good credit and live debt-free.

Tags: credit, credit card, free credit report, how to establish credit