How to Establish Credit

What can you do if you have no credit history and no credit scores?

Consumers with no credit history and no credit scores find it difficult to obtain and establish credit.  If they do find a resource that will provide them with credit, the consumer will typically end up paying high interest rates and excessive fees.

The simplest way to establish credit (at reasonable rates and fees) is to obtain a credit card.  Now, we highly recommend that you avoid applying for several credit cards with hopes that you’ll be approved by one as this will put negative hard inquires on your credit report and this does not help you.

If you apply for a normal “unsecured” credit card with no credit history, you will likely be denied.  We suggest going to your bank and requesting a “secured” credit card.  For example: if you request a $300 secured card, you will typically need to provide the bank with $300 cash as security (if you don’t pay the credit card balance, the bank has your money).  Most secured credit cards operate as normal unsecured credit cards with the issuer reporting your payment history to the credit bureaus (be sure to read the terms & conditions of the credit card). Also, confirm that your bank reports to all 3 credit bureaus.

Once you have a secured credit card, you should have a credit score once it reports to the credit bureaus in the next 30 days.  The score will likely start in the mid 600’s and will grow as your credit files age and you obtain additional credit like an auto loan, student loan, etc.  It’s important to keep the balance on the card below 30% of the credit limit.  In fact, it’s even better to carry a $0 balance as the credit card issuer will generally report a good payment history on a monthly basis to the credit reporting agencies.

Keep These 5 Credit Factors in Mind

1 - Payment History2 - Credit Utilization3 - Average Age of Your Credit Files4 - Mix of Credit5 - Hard Credit Inquiries

Payment History

Your Payment History contributes 35% toward the credit scores, so be sure to budget and pay all your bills on time!  Just 1 new late payment or new collection account reporting on your credit report could lower your credit scores 60 to 100 points.

Credit Utilization

Credit Utilization (balanced on revolving accounts like credit cards, line of credit, etc) contributes 30% toward the credit scores. Make sure balances on revolving accounts remain less than 30% of the credit limits. Again, it’s even better to maintain a $0 balance. If you maintain a $0 balance, just make sure that you use the card to make a small purchase every 4-6 months to keep the card active.

Average Age of Your Credit Files

Average Age of your credit files contribute 15% toward the credit scores.  As your credit files “age”, your credit score will grow.

Mix of Credit

The Mix of your credit files contribute 10% toward the credit scores. The credit scores prefer a few credit cards reporting along with an installment loan (such as an auto or student loan) and a mortgage loan.  It’s not necessary to have a mortgage loan to have good credit scores.

Hard Credit Inquiries

Hard Credit Inquiries contribute 10% toward the credit scores. Hard inquiries occur when you actually apply for credit. Checking your scores online is a “soft” inquiry and does not impact the credit score. A hard inquiry can remain on your credit report for two years; however, inquiries over the last 12 months are factored into your credit scores.