Lenders use your credit score to determine your creditworthiness. If you have a high credit score, lenders will see you as a good risk. They will give you a higher credit limit on credit cards or a higher loan amount, and they will usually offer this to you with a lower interest rate.
If you have a low credit score, you may have a hard time qualifying for a loan, or you may qualify with a very high interest rate.
If you don’t have any credit, you too will also have a very hard time getting a loan. Creditors will not know your credit history, and they won’t be able to determine if you will actually re-pay the loan. For this reason, they may be unwilling to give you a loan.
If you don’t currently have any credit, the following are a few ways to jumpstart your credit.
Open A Secured Credit Card
A secured credit card is a great way to jumpstart your credit. A secured credit card requires you to make a deposit, usually between $200 and $1,000. Your credit limit will be based on your deposit. So, if you put down $200, you will have a $200 limit. This way, the credit card company will have your money to pay off the debt if you don’t pay it.
Secured credit cards will report to all three credit bureaus, so as long as you use your card wisely and make timely payments, you could end up raising your credit score fast. This will give you the credit boost you need to secure your loan.
Open A Store Credit Card
Obtaining a credit card that can only be used at a department store can also help you boost your credit. Department stores typically don’t have the same type of credit requirements that traditional credit card companies do, so you may find it easier to obtain one of these. Be sure to make small purchases regularly with the card and pay the balance off in full each month. This will help you boost your score, which can help you get the credit you need to open a traditional credit card or obtain a loan.
Make Timely Payments On Student Loans
If you have a student loan, making timely payments can help you boost your credit score. Student loans go on your credit report, but they sit idly until you start paying them back. Once you start paying back your student loan, you can improve your credit history by not only paying on time, but also paying more than the minimum due. This will help show potential investors that you’re a good credit risk, and it will also help you pay off your loans more quickly.
Read more about how student loans impact your credit score.
Finance A Purchase
Because department stores are easier to deal with when you don’t have any credit, try financing a larger purchase with a department store. These purchases will usually go on your credit report, and as long as you pay them off on time, you can see a major boost in your credit score.
If you have more questions on getting your first credit card, check out our article detailing what you should look for in your first credit card.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.