How to Build Credit for the Credit-Invisible

A credit score is a number between 300 and 850 that creditors use to determine how likely you are to repay a loan or line of credit. Learning how to build credit is a crucially important financial skill because your credit score impacts your ability to borrow money for a mortgage,  buy a car, or get a personal loan for your education or other goals. If you have no credit history at all, it can be exceedingly difficult to qualify for financing. Fortunately, there are ways to start building credit quickly. 

What is Credit Invisibility? 

A person is credit invisible if they have no credit history, making them “invisible” to the credit system. Studies have shown that between 30 and 45 million Americans are credit invisible, meaning they’ve had little or no opportunity to build credit.  

This can have serious consequences when you feel financially ready to buy a car, go to school, buy a house, or even potentially when applying for an apartment. If you have no payment history on loans or credit cards, a lender may deny your application simply because you have no track record of repaying debt. Since education and home-buying are such strong components of building long-term financial health, credit invisibility can have a long-term impact on your finances. 

How the Credit-Invisible Can Build Credit 

There’s one small advantage to having no credit: You don’t have to dig out from under bad credit. As such, it’s important to start small and be patient. Building a high credit score takes time and financial discipline. 

Get Started with a Credit Card 

It’s much easier to qualify for a credit card than it is to qualify for a loan, especially if you’re credit invisible. Look for a credit card with no annual fee and a low annual percentage rate (APR) to reduce the costs associated with a card. If you have an account with a bank or credit union, they may be able to help you identify and qualify for a credit card. 

When you’re approved, the card issuer will give you a credit limit that is the maximum amount you can spend on the card before paying it back. Use your credit card for everyday purchases like groceries and gas and pay the statement balance in full each month.  

The percentage of your available credit that you use is called credit utilization, and it’s an important factor in determining your credit score. As such, when you’re just starting out, avoid using a large percentage of your available credit before paying it back. 

Become an Authorized Credit Card User 

If a family member has a credit card account, becoming an authorized user is a good way to start building credit. Typically, the primary account holder can simply add your name to their credit card account and as long as they remain in good standing, it will build credit in your name, too. 

That said, being an authorized user is a slower way to build credit than being the primary account holder. 

Consider a Secured Credit Card 

Credit cards are either secured or unsecured. A secured credit card is one that requires a security deposit, known as collateral, to open the card. The amount you put down typically becomes your credit limit, giving you some protection if you can’t make your payments. You may not use this money to pay off a balance, and you’ll forfeit the amount and see your credit limit diminished should you continue making late or short payments. 

Secured credit cards may feel a bit more accessible to the credit invisible than traditional unsecured cards since you make a real out-of-pocket investment to get the card in the first place. Just like a traditional card, as long as you make payments on-time, you’ll start to build credit. 

Explore Alternative Forms of Credit 

You don’t have to use a credit card to build credit. Some other options include: 

• Student loans: The first loans that many people take out are educational ones. Paying off these installment loans at regular intervals and meeting all the loan terms will help you build credit. 
• Co-signed loans: Like being an authorized credit user, a fiscally responsible family member or friend may add you as a co-signer to a loan to help you build credit. For instance, a parent or sibling may help you buy a car by co-signing an auto loan, taking on shared responsibility to repay the loan. The loan will go on both of your credit reports, so make sure you agree how to repay it to avoid any personal issues. 
• Service providers: Many utility, cable, cellular or internet companies require you to sign a contract agreeing to pay for the services each month. Some companies report these payments to credit bureaus, which can help build your credit. 

Credit-Building Best Practices 

Everyone, not just the credit-invisible, should adhere to several best practices to build credit efficiently and effectively. These best practices include: 

• Paying your bills on time and paying the statement balance in full each month. 
• Utilizing well below your credit limit to avoid creditors identifying your spending as risky. 
• Maintaining a healthy mix of credit cards and loans to show creditors that you can manage different types of debt. 
• Opening new credit accounts only when you need to and avoiding opening many in a short period of time. 
• Applying for credit cards that you intend to keep open and with terms that you fully understand. (Closing accounts can impact your credit score) 
• Monitoring your credit report for inaccuracies or fraudulent behavior that can impact your credit score. 

Becoming visible to creditors is easier than you might think. But it can be a challenge to build credit and keep your credit report in good shape. By following these tips and best practices, you can build your credit score over time to help you qualify for major milestones like a car loan or mortgage. 

Contact Information:
Name: Sonakshi Murze
Email: [email protected]
Job Title: Manager