Steps to Building Your Credit History

Money may make the world go ‘round, but your credit score can also open doors to opportunities that improve your life and lift you up financially. What if you don’t have a credit score? It could hold you back when you want a credit card, auto loan, or mortgage. It could also be a problem when you fill out a rental application, apply for a job, or try to get an insurance policy.

But most adults in the U.S. have a credit score, right? You may be shocked to learn that millions of Americans are credit invisible. If you are one of those individuals or know someone who is, don’t lose heart. Steps can be taken to establish credit.

What Does “Credit Invisible” Mean?

Being “credit invisible” means that you don’t have any credit history with the credit bureaus. Without this history, you are invisible to them and anyone who requests a credit report from them. One in every ten adults, approximately 26 million Americans, fall into the credit invisible category, according to a 2015 report published by the Consumer Financial Protection Bureau.

The report found that another 19 million adults had too little credit history or not enough recent activity to generate a credit score. When added together, that’s an estimated 45 million Americans at a disadvantage because they lacked a credit score.

What Can I Do to Establish Credit?

Establishing credit is not an insurmountable task. The key to building a credit history is making monthly payments that are reported to one or more of the credit bureaus. Here are some options to consider.

Credit Cards

For many of us, the easiest way to establish credit history is through a credit card. If you’ve been turned down for a traditional credit card, there are three other options available to most individuals. Let’s take a look at each.

Secured Credit Card

A secured credit card is easier to get than a traditional credit card because it is typically linked to a savings account. The limit on a secured credit card is often the balance you have in the linked savings account or a percentage of it.

By using the card, making on-time payments, and having the bank report your payments to the credit bureaus, you can begin the process of building your credit history. It may also increase your chances of converting to a traditional credit card account in the future.

Joint Account or Authorized User

Opening a joint account with someone who has established credit or becoming an authorized user on another person’s existing account is an option when you’ve been turned down for a traditional credit card. Parents, spouses, family members, or even close friends may be open to this. Because you are on the account, the payment history for it will appear on your credit report and will be used to calculate your credit score.

Retail Store Credit Cards

Gas stations, department stores, and other retail businesses offer credit cards that can only be used at their establishments. Generally, you can expect a low limit and a higher interest rate than those of a traditional credit card. And as with any form of credit, it’s important to keep charges within your limit and make your payments on time each month.

Credit Builder Loans

Often available at credit unions or community banks, a credit builder loan may also be helpful if you have little or no credit history. If you are approved, the loan money is put into an account that can’t be accessed until the entire loan amount is paid off.

By making regular payments over a set period of time, you prove that you can repay a loan. To benefit from this type of loan, choose an amount you can easily repay and confirm that your payments will be reported to at least one credit bureau.

Lending Circles

Although this type of lending has been around for centuries across the globe, formal lending circles can be used today to establish credit history. Here’s how it works: A group of people pool their money and then each month, one member receives a loan until everyone in the group has one.

Repayment amounts are withdrawn from each member’s bank account, and the on-time payments are then reported to the credit bureaus. Lending circles can be operated by nonprofit and for-profit companies.

Self-Reporting Payments

You might expect that “self-reporting” means you can directly report your payment information to a credit bureau. Not true. Self-reporting involves using a third-party service to provide credit bureaus with payment information not normally reported to them. For example, there are companies that report rent, utility, and cellphone payments to one or more of the credit bureaus.

Banking Relationships

Having a checking or savings account will not directly build your credit history. Your activity on these types of accounts isn’t reported to the credit bureaus. However, establishing a good relationship with a bank can be helpful when you apply for credit. Lenders often use your bank account information, along with your credit history, to help determine if you’re a good candidate for a credit card or loan.

As you build your credit history, it’s important to avoid late payments and remove any inaccurate information from your credit file when it is found.

It’s never too late to establish your credit history. Obtaining a nontraditional credit card could be a step in the right direction. You can also partner with someone else who has established credit history via a joint account or by becoming an authorized user.

Taking out a credit builder loan, joining a lending circle, or self-reporting payments are other options. Regardless of the method you use, paying on time and having those payments reported to the credit bureaus is crucial to no longer being credit invisible.

UFB Direct offers high-yield savings and money market accounts that can help you make real progress toward your financial goals.