In today's financial world, your credit score is an important part of the picture. Your score offers lenders and other financial decision-makers a first-glance idea of where you stand. When you don't have a credit rating, providers have nothing to base your credit worthiness on. Lenders especially like to see your credit situation so that they have an idea of how you handled borrowing in the past. They don't want to take a big risk on someone who doesn't have a track record with credit.
If you want to establish a credit score that can potentially help you obtain better interest rates and save money over time, you need to get started. Here are some ideas for starting from scratch.
How to Build a Credit Score from Nothing
It's possible to start building credit as an authorized user on someone else's credit card. In order to be effective, you need to be added to the account of a close relative or your spouse. You can ask to be added to a parent's account or to your spouse's account. As the account holder makes on-time payments and keeps his or her debt level on the credit card low, you can see your score improve.
Secured Credit Card
You might not qualify for a "regular" credit card if you don't have a credit history. However, almost anyone can obtain a secured credit card. These credit cards work just like any other credit card, allowing you to charge purchases and pay them off. You do need to provide a deposit as collateral for a secured credit card, though. Your cash deposit is held in a separate account. If you default, the credit card issuer can claim the funds. It's important to understand that these funds aren't supposed to be used to make monthly payments.
Before agreeing to a secured credit card, make sure the issuer reports to the credit bureaus. If you charge a small amount and pay it off each month, your credit score will quickly begin to rise. After a few months, you can qualify for an unsecured credit card or convert your secured card to an unsecured card (and get your deposit back).
Small Personal Loan
While revolving accounts like credit cards can be effective in establishing your credit history, it also makes sense to obtain an installment loan. Unlike revolving accounts, which allow you to continue borrowing up to a certain limit, installment accounts require regular payments of the same amount and terminate at the end of the loan term. A mix of revolving and installment loans are good for your credit rating. One way to add an installment account to your credit report is to obtain a personal loan.
Many banks offer small personal loans between $500 and $10,000 to their customers. Borrow a small amount with a relatively short term and begin making regular payments. This can help you boost your credit score.
Obtain a Cosigner
If you are having trouble qualifying for a loan on your own, you can get a cosigner to help you. A cosigner agrees to take over the loan if you don't make payments. However, when you make regular payments, you receive the "credit" for it. You can obtain a credit card or car loan with the help of a cosigner, and as long as you are responsible and make your payments on time and in full, you should see your credit improve to a point that you no longer need a cosigner.
Once you have established your credit history, it's not too hard to keep building on your credit score as long as you are careful and responsible with your borrowing.