About 45 million Americans have little to no credit history, according to Lending Tree. This makes them less likely to get approved for a car loan or an apartment.
These big steps in life often require a credit check. With little to no credit, you may need to put down a higher deposit, find a guarantor, or search for an apartment without a credit check. And buying a car can mean a higher down payment, a co-signer, or a cash payment. All of these options can be inconvenient or even impossible for a college graduate.
Unless you’re in a hurry to make a big purchase or live alone, it’s worth taking the time to build your credit today. Here are three ways to get started:
Become an authorized user
Think of being an authorized user as a wheel of credit. It allows you to build your credit with the help of another person and introduces you to the basics of credit. When a parent, guardian, or someone you trust—and who trusts you—adds you as an authorized user, a credit card will be mailed to you with your name on it.
Often parents choose to store the card away for a few years before letting their child use the card. But once it is put in your hands, it can be used as a credit building or emergency tool. This option is good because once you’re ready to apply for your own credit card, you’ll have a credit history to increase your chances of approval.
As a senior in high school, I was added as an authorized user to one of my parents’ credit cards. When it came time to apply for my first credit card as a sophomore, I already had a committed line of credit and was approved immediately.
Based on my experience, my top advice is to become an authorized user as soon as possible if someone is willing to help.
Apply for a starter credit card
There are many starter credit cards with little to no credit history requirements. I would recommend student cards, secured cards and cash back reward cards.
A student credit card is the easiest card to approve for a college student. We recommend Capital One’s Journey Student Rewards card. This card is a valuable tool for earning rewards. This card allows you to monitor your credit profile with unlimited access to your credit score and be automatically considered for a higher credit line in just six months.
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Next is a secured credit card if you have less than perfect credit. This card is backed by a cash deposit, which acts as security for the account. This means the issuer has extra security if the cardholder is unable to complete a payment.
Finally, by opening a cash back credit card, you can recoup a percentage of the money you spend, much like a rebate or coupon.
Using a credit card responsibly is an essential part of maintaining good credit. Once you get your first card, your payment history accounts for 35% of your FICO score. According to Lending Tree, if you’re more than 30 days late on a credit card payment, your credit score can drop by up to 180 points and stay on your credit report for up to seven years, which can make it even harder to get a home or car loan approved.
As a result of three years of on-time payments and a low credit card balance, I’ve been able to build my bankroll. There was no problem approving a car loan and apartment without paying a deposit or requiring a co-signer.
Explore alternative ways to build credit
I know how overwhelming it can be to navigate building your credit. For some, getting a credit card or becoming an authorized user on a parent’s card is off the table. Fortunately, there are other options:
Consider applying for a credit home loan. These are low-risk loans that one can easily qualify for without any credit history. In addition, all payments made with this loan are reported to Equifax, Experian, and TransUnion.
If you shop online frequently, installment loans at the point of sale can be an option for building credit when you buy now and pay later. When purchasing, you can pay in four or more interest-free installments. While these services have their perks, a downside is that you risk being charged a late fee if you miss a payment. I have experience with BNPL but prefer not to shop online unless I can pay them in full.
Finally, services like Experian Boost can help improve your FICO credit score by tracking your monthly phone and utility payments. In order to use this service, you must provide proof of payments for three months within the last six months. Using this service will do more than just increase your FICO score right now—it will also increase your credit score in the long run. And after you’ve secured your first home, you can also use your rent payments to improve your score.
Even though you don’t need a credit history to get a home or car loan, not having a loan can make the application process difficult.
Understand that credit is used for many things in adult life. So if you have a credit score that falls in the good range, you improve your chances of approval.
With responsible lending practices, you’ll be well on your way to getting your next home or car before you know it.
Related: Things to know before applying for a credit card in college