If you’ve never had a credit card or a loan, your credit history is most likely a blank slate. Your credit history, as documented on your credit report, is a record of how responsibly you’ve repaid money you’ve borrowed.
Creditors and lenders use your credit history to make decisions about whether to give you a credit card or extend a loan. However, if you have no credit history, there’s no record of how you might manage debt. As a result, many creditors and lenders won’t lend you money.
It may seem like an impossible loop, but there are ways to build credit when you have no credit. Here’s how in six easy steps:
A secured credit card is just like a “regular,” or unsecured credit card, only you are required to put down a security deposit – typically $300 to $500 – to provide assurance to the creditor that you will repay your debt. Your credit limit is often the amount of your security deposit, or a percentage thereof.
Many people confuse a secured credit card with a debit card, however the two are very different. First, banks do not report debit card usage to the credit bureaus, as a debit card is not an extension of credit. A debit card is merely a convenient way to access the funds in your bank account.
Creditors, on the other hand, do typically report secured credit
card activity to the credit bureaus, as a secured credit card is an extension of credit. Your purchases are not deducted from your security deposit. Rather, each time you charge something, you are effectively borrowing money from the credit card company and are obligated to repay that debt. As a result, how responsibly you use a secured credit card will affect your credit score – both positively and negatively.
2. Only charge what you can afford to pay off in full.
Building credit means consistently demonstrating your ability to pay back any money you borrow. Your goal is to prove to creditors and lenders that you can responsibly manage debt. That’s why it’s smart to start small – only charge purchases that you can afford to pay off in full every month.
Unfortunately, it’s not enough to open a credit card – secured or otherwise – and sit on it. If you don’t use your credit card, you’re not demonstrating anything. Use your card at least once a month for small purchases like inexpensive meals, gasoline and drug store essentials. Try to not charge more than 50 percent of your credit limit in a given month however, as that can take a toll on your credit score.
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