Article 6 min read

How to build credit history (even when you have none)

Credit card history
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"Wait, why am I getting denied for this card?", I wondered to myself after seeing the rejected status when trying to get my first travel credit card. I was eager to start flying for free like I saw all the other bloggers doing. The only thing holding me back was that I couldn't get approved for the card. I knew that continuing to apply for cards would hurt my score and wasn't sure what to do next. After calling the reconsideration line, the person told me I got denied because I had no credit history. I had never taken a loan, gotten a credit card, or been an authorized user on a card. I didn't know where to go next.

It turns out my situation isn't uncommon. People just starting out have trouble getting credit cards. Cards with great bonuses in particular normally require good credit history and high scores to get the amazing bonuses you see posted around the web. For many of us, the issue is simply that we don't have any credit history.

The weird thing about credit history is that in order to get approved for something you need to have already gotten some form of other loan or credit. It often becomes a catch 22. You can't get the loan or card you want without a credit history, but to establish that history someone has to give you a card. It can feel like there's no way to get ahead.

I was really frustrated with my situation and wondered how I could establish my own credit history. It turns out there are some financial vehicles specifically made for this situation. We will go through some options to make it easy to establish your own history. Before we jump into the "how to's" let's talk about what credit history is and why it is important.

What is credit history?

Credit history is your record of credit worthiness throughout your whole life. Your history (in the US at least) is tied to your social security number. Some of the items included in your credit history are:

  • date that credit was issued to you
  • any missed payments to creditors
  • current balances of loans or cards
  • on time payment history

This entire list is what makes up your credit score. If your credit history is "clean", meaning you have paid your creditors on time with no defaults, your score is often high. 

What creditors are looking for in a credit history is essentially with this person pay me back? Have they payed people back in the past? How much credit do they already have out and how much do I feel comfortable lending to them now? This is normally done by a computer algorithm, but even the computers are "asking" these questions.

Why is credit history important?

Having a good credit history is important because it is what helps banks decide if they will extend you any loans. Without credit history it is nearly impossible to get a credit card or approved for a loan. Even though I am cautious of accruing debt, sometimes doing so is unavoidable. You will thank yourself when you want to purchase a house that you built some credit history.

What's even more important than credit history is making sure that your history is clean. Clean credit histories mean high credit scores which have some benefits:

  • lower interest rates
  • banks are willing to extend you more credit

Watch your credit score as your build your history. You can use sites like Credit Karma that will alert you of changes to your credit score. Watching your score is especially important early on, when your score can go up or down a lot with small changes.

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How to establish credit history

Alright, now that we got why you should care about your credit history out of the way let's go in how to do it.

Credit Card

Open a secured card

The most common way to build credit is to open up a secured credit card with a bank. A secured credit card is a card that you often have to back up with real cash. The limit for these cards is normally a 1:1 ratio for cash you put up as collateral. If you were to secure your card with a $400 cash deposit, your limit on the card is $400.

These can be a great way to build credit if you have some money you feel comfortable tying up for a little while. Be careful with lower credit card limits as credit utilization is a huge factor of your score. You should try to limit your utilization to 20% or less. If your limit is $400, try to never have more than $80 on the card at one time to build credit fastest.

Open a secured loan

A secured loan functions similarly to a secured credit card, but you get a lump sum up front. Most often you "borrow" against some form of collateral, like savings account or against the value of your car, and a bank issues you a loan based on the value. Over time you pay it back (plus some interest) to show that you can pay your loans back on time. Most banks offer this to their customers. Also know that it may sometimes be called a credit-builder loan.

Have someone add you as an authorized user

Getting added as an authorized user can be a great way to establish some credit. To do this have someone you trust add you as an. Becoming an authorized use required an immense amount of trust. Being one gives you the power to spend money against their credit limit. The person adding you has to trust you won't rack up credit card debt as they are ultimately the ones responsible for the card.

Before you have someone add you an authorized user, you must also trust the person with the card. If they stop paying their credit card, or pay it late, your credit score could go down because of it. Both sides need to have full trust in one another for the authorized user method to work.

Open a student credit card

This method is a bit more limited because it only works for students. Some banks offer cards directed at students for establishing their first credit history. I personally did this one myself and I remember having to prove I was a student to be eligible. The limits for these cards are often low (sub $500) but is a great option if you are still in school.

If you are struggling to get approved for a credit card or your first loan, try the above methods. Keeping track of your credit score and establishing a long history will pay off in the future. Make sure to keep your history clean and you should be able to get approved for nearly any card or loan you would want!