How to Improve Your Credit When You Have None
So, even if you’re one of those financially responsible people who has been meticulously stashing birthday cash in a piggy bank since you were in kindergarten, you just haven’t been given a chance to prove yourself yet with the credit bureaus. Plus, you’re starting out at a disadvantage because “length of credit history” accounts for 15 percent of your credit score.
So, how do you start building credit when you have none? Here are four smart strategies:
1. Ask your landlord to report your rent
Renting doesn’t traditionally affect your credit. An exception, of course, is if you stop making payments and a judgment is issued against you, which could cause a negative mark on your score. This could be frustrating if you’re making monthly, on-time payments, and have nothing to show for it on your credit report. There are, in fact, ways you can make sure your positive rental payment history is added to your credit report.
While some large corporate landlords already report to the bureaus, many others do not. The solution: Register with a third-party website like Rent Reporters, suggests Adrian Nazari, CEO and founder of personal finance website Credit Sesame. He notes that your landlord will need to verify your rent payments each month.
If you want to bypass your landlord, though, you can sign up with a rent payment service that works with Experian RentBureau and that will report to Experian, one of the three major credit bureaus, says Nazari. In that case, your rent is paid through the service and no independent verification is needed.
2. Become an authorized user on someone else’s account
Does mom have great credit? Is she the model of financial responsibility? You can, potentially, piggyback on her good credit. If you know a family member who does a great job managing his or her credit card, you can ask to become an authorized user on their account.
“This means you get a credit card that shares the primary cardholder’s credit limit,” says Nazari. “You can become an authorized user even if your own credit history is minimal.”
As long as the other person pays the bill responsibly every month and keeps the balance low in relation to the credit limit, you’ll begin building credit, too. This is a strategy that works even if you don’t personally spend using the other person’s account. A pro tip from Nazari: Make sure you check with the card issuer to confirm they report authorized users to the credit bureaus, as not all of them do.
3. Boost your credit score with new scoring models
Recognizing that it’s difficult to get the credit momentum going, FICO and Experian both have new systems that allow you to boost your credit without opening any credit cards or taking out any additional loans.
ExperianBoost is an optional new platform that allows consumers to give read-only access to their bank accounts so that utility payments can help build credit. Experian says the program will best benefit consumers with thin credit files (less than five lines of credit) and those who have scores between 580 and 668. The bureau’s analysis found that 10 percent of consumers with “thin credit” became score-able and two out of three credit scores improved.
UltraFICO is a new credit model that takes into consideration consumers’ money-management skills. Users opt-in by giving FICO access to bank accounts like checking, savings, and money market accounts. In return, paying bills on time month after month, keeping a few hundred bucks as a buffer in a savings account, and not overdrawing a checking account are all factored into FICO scores for a potential boost.
4. Get a starter loan
Some banks offer credit builder loans, which are basically savings accounts that work like an installment loan, explains Adam Jusko, the founder and CEO of personal finance and credit card comparison site ProudMoney.com.
Think of it this way: The bank will “loan” you $500, but doesn’t actually give you that money until you have paid the bank that much money, plus interest, through a series of installment payments.
“Once you’ve met the terms of the loan, you get the money back,” he says. “You’ve essentially saved the $500, but paid the bank interest in order to have the bank report your payments to the major credit bureaus as a way to improve your credit score.”
One last tip: If you’re trying to build credit, don’t become obsessive over checking your score. Checking in on it once a month or so is a good habit.
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