When you’re just starting, it can seem like you’ll never be able to build credit because you have nothing to build on. Since they have no basis for evaluating your creditworthiness or predicting how you may manage credit if they extend you, card issuers and lenders often avoid working with individuals with no credit history.
The good news is that a few distinctive varieties of credit card products are available to consumers with a limited credit history or even those with no credit history. Therefore, research your choices for obtaining a credit card if you do not yet have a credit history. We’ll review your options for establishing a credit history and getting a credit card if you don’t already have one.
What exactly does “no credit history” mean?
A lack of credit history is not the same as a low credit score. A low credit score indicates that you have made poor use of credit in the past, while having no credit history suggests that you have never used credit and, hence, have no credit-related activity on your credit report. Lenders cannot evaluate your creditworthiness without access to your credit report information.
Furthermore, a credit score of 0 is not necessarily indicative of a person with no credit history. Considering that the most widely used credit scoring models preclude the possibility of a score of zero, this is a crucial point to make. A credit score is meaningless if you don’t have a credit history.
Once you start making credit purchases, the credit bureaus will have data from which to derive your credit score. The Fair Isaac Corporation (FICO) score is the most common credit score, which ranges from 300 to 850. It shows that higher scores are significantly better.
- Exceptional: 800 and higher
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 579 and lower
For those unsure of their credit standing, AnnualCreditReport.com offers free access to data from each of the three leading credit agencies annually. Remember that this is the only official portal for obtaining free credit reports.
Checking your credit report can tell you if there is enough data to generate a credit score and if there is any information on it. There may not be a centralized location to check your credit score like there is for credit reports. However, there are still plenty of free options available to you.
To get started, sign up for a service that monitors your credit and provides you with a free credit score, or enroll in a service that does so and also provides you with free credit monitoring tools. For instance, Capital One’s CreditWise lets anyone have a free peek at their VantageScore 3.0 from TransUnion.
Where do I start looking for credit cards if I have no credit history?
Very few credit card options are available to someone with no credit history. The first is a “secured” credit card, similar to an unsecured card. Still, it requires a collateral deposit instead of a regular credit check.
A typical security deposit for a secured credit card is $200 or more, which is needed to guarantee your credit limit if you are approved for the card. Consequently, your credit limit will likely be limited at the outset. If you put down $300 for collateral, you’ll probably get a $300 credit line to start; if you put down $400, you’ll get $400, and so on.
The best part is that if you responsibly use a secured credit card and pay off your balance in full before closing your account, you will get your deposit back. That remains true even if you transfer your balance to a new, unsecured credit card from the same provider or cancel your account with a zero amount.
There are a small number of unsecured credit card choices available to those with no credit record, which means that you won’t need to make a security deposit to open an account. Unsecured credit cards may have low limits and fees for those without a credit history. But if you don’t have a credit history and you want an unsecured credit card, you should search for one that doesn’t charge you a lot of money for using it.
What to think about before applying
A person with no credit history must ask themselves some pertinent questions before applying for a credit card:
- When was the last time I looked at my credit history and score? Don’t assume that since you haven’t applied for credit before, you don’t have a credit history. You may have a credit score based on information in your credit report from various financial organizations with which you have had dealings in the past.
- How much of a cash deposit am I willing to make as a deposit? When you’re just starting, a secured credit card may be the best option; however, you’ll have to get used to the idea of putting down collateral. Look into secured card choices that require a minimum deposit of $49 if you’re strapped for cash.
- Am I ready to get serious about building credit? You should be able to demonstrate your creditworthiness before applying for a credit card. This often entails the ability and willingness to avoid charging your credit card to its maximum and the dedication to paying off your credit card balance on time and in full every month.
Having a friend or family member who already has a credit card (and so a positive credit history) add you as an authorized user is another way to begin establishing your credit history. This will allow you to benefit from their stellar credit history while their account appears on your credit report.
Remember that if the individual you designate is irresponsible with their credit, the subsequent negative mark could also appear on your report.
Avoiding common pitfalls when building credit
You won’t have a lot of credit card options, and they won’t be perfect if you don’t have a credit history. It is essential, however, to be aware that some credit card deals for persons with no credit are significantly superior to those of other companies. It would be best if you were mindful of these potential pitfalls when you weigh your options:
- Avoid credit cards that charge you to apply for the card, have monthly maintenance costs, or have exorbitant annual fees. You can find several secured credit cards that don’t charge a yearly fee and unsecured credit cards that don’t charge an annual fee that you might be approved for.
- Credit cards for people with low or nonexistent credit scores typically have sky-high annual percentage rates (APRs). The best way to avoid paying interest on a credit card bill is to pay off the entire balance each month, even if you have a card with a high annual percentage rate.
- Take the necessary precautions now to ensure that you can start building your credit without making any serious blunders. You must pay your credit card balance in whole and on time every month. Don’t use all your allotted credit, either.
Create a new credit history by using a new credit card
Knowing how to make the most of your credit card is essential whether you have a secured or unsecured card. The first step is to learn what goes into making up your credit score. An individual’s FICO credit score is based on the following elements:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- New Credit: 10%
- Credit Mix: 10%
At 35%, payment history is the most significant factor in determining your credit score. Therefore, paying your credit card balance on time or early every month is crucial. There are no exemptions!
The proportion of your outstanding balance to your available credit is the second most significant factor in your credit score (30%). Suppose you want to maintain a high credit score. In that case, it’s recommended that you utilize no more than 30% of your credit limit at any given time and, ideally, no more than 10%.
If your credit card limit is $500, you shouldn’t have more than $50-$150 in charges, whereas if it’s $200, you shouldn’t have more than $20-$60 in debts. Since the credit limit on your first credit card is likely to be limited, it’s in your best interest to keep the balance low or even at zero.
Next, the duration of your credit history is an element that can only grow in importance with time. You can improve your score in the category of “new credit,” which is based on the number of credit applications you have made in the past six months, by not establishing several new accounts all at once.
Last but not least, your credit mix is something that can stabilize on its own. You’ll have more loans and credit card options when you’ve established yourself financially and have a high credit score.
Finally, you may feel like you’re in a chicken-and-egg dilemma if you don’t have a credit history: how can you establish credit if lenders won’t offer you a credit card? You can build a good credit history and access to more credit possibilities by utilizing a combination of secured and unsecured credit cards and possibly an authorized user account from a family member or friend.
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