Having no credit history might seem like a disadvantage — and it can make it harder to get a loan — but it’s actually an opportunity to build a good credit score from the ground up. Everyone has to start somewhere, so why not start on the right foot?
Tips for good credit habits
Having good credit is all about being financially responsible. Lenders want to know that they can trust you to pay back what you’ve borrowed and they do that by looking at how you’ve behaved with credit in the past.
Your credit score is calculated by your payment history, amount owing, length of history, new credit and variety of credit. Check out our blog post that goes into more detail on how credit score is calculated. There are a lot of things you can do to improve your score, but the most important is paying all of your bills on-time and in-full.
Here are a few other tips:
- Increase your credit limit;
- Use credit often;
- Keep a low balance on revolving accounts; and
- Monitor your credit report.
Starting off with good credit habits will help you build a good reputation as a responsible borrower.
How to establish your credit
There are plenty of resources out there for people looking to build their credit. Here are a few proven methods:
- Get a secured credit card
- Apply for a student credit card
- Become an authorized user
- Get a co-signer
- Find a credit-building loan
- Make your rent count
- Get a student loan
- Get a car loan
Get a secured credit card
A secured credit card works just like a regular (or unsecured) credit card, but doesn’t require a credit check or previous credit history for approval. Instead, card issuers ask for a security deposit as collateral on the account.
The amount of the deposit varies from $100 to $10,000 and the amount you put down becomes your credit limit. Your deposit is returned to you if you decide to cancel your card.
Since the issuer will be reporting your monthly payments to the major credit bureaus, secured credit cards are a great way to build credit without the risk of spending more money than you have.
Check out our blog post for the best credit cards to apply for when you have no credit.
Apply for a student credit card
Student credit cards are designed for young people with little or no credit experience. Most are easy to get approved for — as long as you’re a college or university student — and they often have lower interest rates than other credit cards.
This can be a smart way to get into the unsecured credit card market if you have no credit history. Make small, regular purchases with your card and pay off your balance each month to build credit.
Becoming an authorized user on someone else’s credit card is an effective way to build credit without liability. You are able to make purchases with the card in your name, but because you’re not the primary cardholder you’re not responsible for paying off the debts that accumulate.
As an authorized user, the account activity will be reported to the credit bureaus under your name as well — giving your account a boost without having to apply for your own credit. The downside is that negative activity, like late or missed payments, will also be recorded in your name.
Get a co-signer
If you need a loan but don’t have enough established credit to be approved on your own a co-signer can help you out. A co-signer is essentially lending you their good credit so you can take out a loan. This blog post explores more about how cosigning a car loan works and how it can improve your credit situation.
Getting a co-signer can be a good way to build credit for someone with no history, but it can also be risky. As with being an authorized credit card user, your co-signer is responsible for making delinquent payments. Regularly missing payments can put a strain on your relationship with your co-signer, who is usually a family member or close friend.
Find a credit-building loan
A credit-building loan is similar to a secured credit card. With this type of loan you borrow a specific amount and your bank deposits the sum into a special savings account. You won’t be able to access the money until you’ve paid off the total through agreed upon monthly payments.
A credit-building loan is ideal for someone with no credit because they have minimal requirements. Your bank will report your monthly payments to the credit bureaus. Credit-building loans are usually offered at credit unions instead of larger banks.
Make your rent count
If you pay rent you can make that regular, monthly payment count towards your credit history. This is a new area of credit reporting in Canada and you’ll have to sign up for the service through a third-party company, like RentTrack.
RentTrack reports rent payments to Equifax Canada made through its online system. While this is a great option for building credit without getting in debt, the service isn’t free and your landlord also has to be on board.
Take out a student loan
Instalment loans are great for people new to credit because they have a set borrowing amount, unlike credit cards where your balance fluctuates with your usage.
Student loans don’t require a credit check or a co-signer. They can help you pay for tuition and often don’t need to be repaid until after you graduate. It can, however, take a long time to pay off student loans because the amount borrowed is usually quite high.
Apply for a car loan
Car loans are another great instalment loan option for people with no credit history. With a car loan, you borrow the amount needed to cover the cost of the car and are set up with a monthly payment and interest rate that stays the same throughout the term of the loan.
You can build a great credit foundation by making all your payments on time and paying off the loan in full. However, not every lender will give a car loan to someone with no credit.
Birchwood Credit Solutions specializes in car loans for customers with bad or non-existent credit. Give us a call today or visit one of our three locations to learn about our quick and easy application process.