How can you establish credit if you've never had a credit card or loans?

July 18, 2014 3:21 PM

I've never been in debt, I've never had a credit card, I have money in a bank account, but today I went to look up my credit report and there was nothing in it. I'm not planning on making any big purchases in the next two years, but I'm sure eventually I'll want to buy a house or a car. How can I build up my credit, given that many places won't give me a credit card due to the fact I have no credit score?

I went to my bank, and though I had a decent amount of money in the bank, have direct deposited my paychecks for three years, and have never had an issue with them, the woman I spoke to said they would likely deny my application because I have no credit history. Most of the no-credit-score cards out there seem predatory-ish and I'm nervous about them. What should I do?

posted by Archibald Edmund Binns to Work & Money (20 answers total)

Get a secured card, put some money on it, charge small amounts on it and pay it off monthly. That will put revolving credit on your report. Make sure to keep the amounts well below the limit, as getting close to the limit can lower your score.
posted by xingcat at 3:28 PM on July 18, 2014 [8 favorites]

Most of the no-credit-score cards out there seem predatory-ish and I'm nervous about them.

Oftentimes most of the predatory stuff applies only if you have a balance. If you pay the full balance every month, that eliminates a lot of
the problems. Look for a card with the least amount of maintenance fees (preferably none), use it to buy everything (up to the limit and your budget of course) and pay the full balance every month. Be super-vigilant about it, though. You'll pay dearly if you miss a payment or don't pay the full balance.
posted by griphus at 3:28 PM on July 18, 2014 [1 favorite]

Make sure to keep the amounts well below the limit, as getting close to the limit can lower your score.

Totally forgot about this. If buying "everything" on the card takes you close to the credit limit, stop well before you hit it.
posted by griphus at 3:29 PM on July 18, 2014

Get a card at a specific store: Old Navy, Sears, Best Buy. Those retailers are more likely to give you a credit card because all you can buy with the card is their stuff. Its not like you can go and put a whole Vegas vacation on your Sears card, so you are not as big a risk for them. Get a card or two, shop monthly for something small, pay off the full balance when the bill comes in. Later, rinse, repeat.
posted by NoraCharles at 3:30 PM on July 18, 2014 [3 favorites]

There are credit card companies, most quite rapacious in their terms, which exist solely for this purpose - giving credit cards to people with bad credit. Yes, I know, you don't have "bad" credit history, you have NO credit history. In the eyes of the credit industry this is the same thing.

Google "credit cards for no credit" and you will get a list of companies that provide this service.

I lived in Europe as an illegal alien for about half my adult life, and when I moved back to the US I had no credit history. I got one of these terrible cards with a $200 limit which charged me an exorbitant annual fee and something like 35% interest on my balance. I used it for things like a single cup of coffee once a month and paid the bill in full every month and on time. After about a year - 18mo of this credit purgatory I got a regular card from a regular issuer with a 10k limit. My credit is awesome now, mid 800s.
posted by elizardbits at 3:30 PM on July 18, 2014 [5 favorites]

If you are still at school (or close to school age) look for someone offering cards on campus from a national brand (chase, citi, amex, etc.). This is how most people get their first credit card and start to build a credit history. Don't let this wait, you want to do it when you are young since these vehicles exist.

If you are out in the "real world" this is harder, but I would start by calling some of the major credit card issuers and ask your question - believe me you will find at least one willing to take a chance on you - although probably for a low limit.

Always pay off the bill in full every month - the idea you need to maintain a balance to get a better credit score is wrong.
posted by NoDef at 3:31 PM on July 18, 2014

use it to buy everything (up to the limit and your budget of course)

Actually, no, don't do this (sry griphus) as heavy use of the card will count against you. You should never go over 50% of your spending limit on each individual card when building credit. In fact you should try to keep it to about 30% of the limit, or just use it as sparingly as possible.
posted by elizardbits at 3:32 PM on July 18, 2014 [1 favorite]

If your bank doesn't offer a "secure" credit-building card, see if there's a credit union nearby because they probably will. If not, see if there's another bank nearby that does, perhaps a local bank. A "secure" card means you provide cash up front that acts as your credit, so the issuer is not taking any risk on you. After awhile this will build up your credit.
posted by bleep at 3:33 PM on July 18, 2014 [1 favorite]

I was in your situation a year and a half ago. I had had a credit card and a car loan previously, but they were so long ago that they weren't on my credit history.

I got a secured card from a credit union, with a $1000 limit. That meant I had a separate account that I had to keep $1000 in at all times. Which is kind of nonsense because then it's just like a debit card except I have to manually transfer money around. Anyway, after 9 months of that I have a kind of good, but short, credit history. So then I qualified for a proper credit card - still with a relatively low limit. I'm using it regularly, but keeping the balance low, and basically now I'm building a credit history.

In case it ever becomes non-stupid to buy property around here.

Anyway: Yeah, credit unions are great.
posted by aubilenon at 3:40 PM on July 18, 2014 [2 favorites]

Your credit union should offer a no-fee credit card secured by the balance in your bank account. Many ATM debit cards also double as credit cards if they come with a Visa/Mastercard logo.

Or - at least in the past - American Express and Discover were eager to offer me low-limit starter credit cards when I had zero credit history as a foreign (grad) student. (And yes, I still have the same cards some 18 years later, along with N others.)

Just make sure you're not paying a stupid annual fee, and follow all the arbitrary rules they impose if you want to maximize your credit score: use credit regularly, but do not exceed say 50% of available credit, usually pay off in full but carry a tiny balance once or twice so that you're not labelled a deadbeat customer, etc. Welcome to your shitty consumerland paradise.

PS Also, things like utility and cable bills in your name would build credit, I think. With no credit history they might require a starting deposit.
posted by RedOrGreen at 3:44 PM on July 18, 2014

I did basically the same thing as elizardbits (except for living in Europe), and it worked.
posted by Area Man at 3:59 PM on July 18, 2014

Debit cards are not credit cards even if they have a Visa/Mastercard logo. You're not being extended credit and no credit file is submitted for you to the credit bureaus.

Many banks, Wells Fargo, Bank of America, and Capital One, offer secured cards. You secure your credit line with a deposit. If you pay your bill responsibly, i.e. not late on payments, don't go over the limit, the card can often be converted to a regular credit card.

That meant I had a separate account that I had to keep $1000 in at all times. Which is kind of nonsense because then it's just like a debit card except I have to manually transfer money around.

I don't know this means exactly. I've never seen my separate account and never moved money around. After establishing the account, it's exactly like a regular credit card. I get a bill each month and pay it. My on-time payments get reported to the credit bureaus.
posted by shoesietart at 4:06 PM on July 18, 2014 [2 favorites]

Oh maybe other banks do it different. That's what it meant for me though. They made me make a separate account for it even though my regular account had more than that in it.
posted by aubilenon at 4:15 PM on July 18, 2014

Get a secured card

I was going to suggest this as well. A couple of things to add, your credit limit will be determined the amount you deposit. The bank will use that deposit as collateral so if the card gets charged off, they'll use that cash to settle the debt. Usually, if you use the card responsibly for one year, the deposit is returned to you (with interested but at, like, 0.1%) and the secured card just becomes a regular credit card.

If you pay the balance off in full before the grace period every month, nothing gets recorded on your credit report. It looks the same as if you're not charging anything at all. You can charge stuff on the card up near the limit and, as long as you pay it all off, it doesn't hurt anything. You just want to occasionally have a small statement balance that you don't pay off in full and pay a bit of interest on before you pay it all off.

So, let say that your statement cuts on the 20th of the month and your payment is due 30 days after the statement date (this is also your grace period. Charge $50 worth of stuff on the card for that period, make the minimum payment (which will likely be $20) before the due date. Then the day after the due date, pay off the rest. You'll pay a few cents in interest (less if the charge was close to the 20th) and then go back to using the card however you normally use it. In a few months, do it again.
posted by VTX at 4:18 PM on July 18, 2014

Oh also the thing my mom's financial adviser (now mine) told me to do was go into the bank where I had my shitty checking account and ask for a loan of a laughably small amount, a few hundred dollars, and then pay it back exactly as they told me to in monthly increments plus whatever interest was charged. I chose to go the shitty credit card route instead because I could do it online without having to speak to a human being in person.
posted by elizardbits at 4:58 PM on July 18, 2014 [2 favorites]

My own personal anecdote, so take it for what it's worth. Things might not be as bad as you think. I didn't get my first credit card until I was 28. Chase gave me my first card, with a meager credit limit of $500. A few months later I was able to increase my credit limit substantially. If you have a banking relationship with a bank that issues credit cards, applying for one of their cards might help increase your chances of acceptance.
posted by prunes at 5:41 PM on July 18, 2014

If you pay the balance off in full before the grace period every month, nothing gets recorded on your credit report. It looks the same as if you're not charging anything at all. You can charge stuff on the card up near the limit and, as long as you pay it all off, it doesn't hurt anything. You just want to occasionally have a small statement balance that you don't pay off in full and pay a bit of interest on before you pay it all off.

That first sentence is not true. Credit card companies report your revolving balance (how much you have outstanding at a given time) even if you pay in full each month. So, on my credit report, for each account they have a line item going back two years (to mid-2012) that reports for each month the account balance / date payment received / scheduled payment amount / actual amount paid

although for actual amount paid some say "no data",others report the actual amount paid. Anyway, "account balance" is the amount that was due on my monthly statement even though it was paid in full with no interest due.
posted by metahawk at 6:24 PM on July 18, 2014 [2 favorites]

-Don't charge more than 10% of the limit at any given time.

-Pay in full every month and on time.

-Don't go over 50% of limit unless in extreme emergency.


Go through a credit union if possible with a low interest rate, preferably less than 12%, no annual fee, and cash back. Even 1% cash back is better than nothing and you'll actually use it (gets credited back towards balance), than rewards you won't use or might expire. The limit doesn't matter starting out, because what matters is *how* you use the card.

You only need one card. What matters is time. How long you've had the card and the average length of your credit. So don't open 5 cards thinking you'll build credit faster, it doesn't work that way and will hurt you in the "average length" part of your credit score calculation. You should be just fine.
posted by lunastellasol at 7:32 PM on July 18, 2014

If you just have no file, there's no need to do a secured card, and there are banks that will give you an account without stupidly high fees, but you may have to take an ~$50ish annual fee for the first one.

Just don't get one of those cards that charges you an account opening fee and on and on. Those are total scams. Store cards are usually easy approvals, as are Capital One's subprime cards (which either charge an AF or a sky-high APR and can never convert to prime, although you can later get a different account at reasonable terms with them once you have a few other accounts with a couple years' history), but my first card as someone in your situation was actually from Citibank.

Another trick is that affinity cards usually have easier approvals and higher limits.

That said, if you have the money to leave locked up for a while and find that your only other options come with high fees, the secured card is a fine way to go, it's just not strictly necessary.

Oh, and when you almost inevitably get the initial decline from the prime issuer with an online or mail-in app, call them and ask for reconsideration. Few enough people do this that the credit analysts are fairly likely to take the chance with a $400-$500 limit.
posted by wierdo at 8:43 PM on July 18, 2014

If you pay the balance off in full before the grace period every month, nothing gets recorded on your credit report. It looks the same as if you're not charging anything at all. You can charge stuff on the card up near the limit and, as long as you pay it all off, it doesn't hurt anything. You just want to occasionally have a small statement balance that you don't pay off in full and pay a bit of interest on before you pay it all off.

Do not do this, it is bad information. There is no need to occasionally have a balance you don't pay off...your monthly balance is what gets recorded on your credit report (i.e. how much you charged during the month) not how much interest you have paid or the net balance (charges - payment).

Also if you do run a balance be careful how the interest is computed. Once you don't pay in full you get into the fine print for many cards - in many cases you actually pay on the "average monthly balance" which means the timing of your payment (again assuming it's not in full) doesn't matter. This also means that paying most of the bill doesn't really reduce your interest it's computed on the average balance not on the net.
posted by NoDef at 9:05 PM on July 18, 2014 [1 favorite]