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How to Build Credit with No Credit
Having no credit makes building credit difficult. Without an existing credit history, lenders have no way to determine whether a potential borrower is a good prospect or a bad risk. Building a good credit history is important to ensure the best interest rates when applying for various types of loans and may also be a factor when seeking employment, insurance or housing.
The question is, without existing credit, how is it possible to build credit? The credit-building process is simple but takes time, perseverance and responsibility. Building credit requires the wise use of credit, as lenders want to loan to those who have shown an ability and willingness to pay as agreed. The privilege of credit is extended to those who demonstrate credit worthiness.
First Steps to Build Credit with No Credit:
Open a bank account.
The first step toward building credit is opening a checking or savings account. Loan applications request bank account information and having an account demonstrates some level of money management skill. A checking account is recommended to facilitate the bill paying process. Ensure that all bills, no matter how small, are paid on time.
Strive to establish a history of steady employment and a stable residence. Frequent moves or job changes create an appearance of instability, which is unattractive to potential lenders. Special rules may apply to college or university students that allow for the extension of credit despite a lack of employment.
Apply for a credit card from an appropriate source. If attending college, apply for a student credit card. A department store credit card may be used to build credit providing that the merchant reports to the credit bureaus. As a last resort, a secured credit card is a good credit building option. Be aware that secured credit cards require a deposit equal to the credit limit and the card issuer will take the deposit should default occur.
Continuing to Build Credit
Once the initial credit card is obtained, use it with care. Avoid the temptation to overspend and be sure to pay the bill when due each month. After a period of time, apply for another credit card or an auto loan. As 35% of your credit score is based on payment history, continue to pay all bills on time. Also, keep in mind that many municipalities and landlords report delinquent payments so ensure that every financial obligation is taken care of when due.
Another key component of a credit score is based on the amount of available credit compared to the amount of credit being used. Demonstrate wise use of credit by keeping balances low. The higher the amount of available credit in relation to the debt owed the better the credit score.
To speed the process of building credit, explore the possibility of becoming a joint account holder with a parent or other relative who has already established good credit. As time goes by, your credit score will begin to reflect the activity on the joint account. Be aware that all joint account holders are responsible for the debt in the event of default so choose a credit partner with care.
Another credit building strategy is to seek a co-signer. Asking someone with established credit and steady employment to co-sign a loan often results in an approval when a denial would have been issued otherwise. As the co-signer is responsible for the loan in the event of default, ensure that adequate income is available to make all payments on time, as agreed.
Protecting Credit and Looking to the Future
Be sure to periodically check your credit report for accuracy and monitor it over time. A free report is available each year from each of the three major credit reporting agencies. Schedule requests so that a report is received every four months. Dispute any inaccuracies and have the report corrected, as needed.
The main purpose of establishing credit is to make getting additional credit easier and to qualify for better interest rates. As credit is being established, early accounts may no longer be of use. Keep them open anyway. Inactive accounts can help raise the credit score by increasing the amount of available credit in relation to the amount of credit being used. Maintain a good credit rating by continuing to pay all bills on time. Avoid taking on more debt than can be paid when due. Careful use of credit will ensure that adequate credit is available when needed.
Guard against people or situations that might damage your credit rating. Avoid taking on responsibility for the potential financial misdeeds of others, such as roommates who fail to pay the rent or utilities. Beware of co-signing a loan or taking on a joint account holder. Follow the example of lending institutions and ensure that anyone seeking help is credit worthy.
Opening a standard bank account can be difficult if you’re suffering from bad
credit. However, there are ‘no credit check bank accounts’ out
there, which can be opened without a credit check. Take a look
at an example here:
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