How to build your credit

Dear HomeSight:

I don’t have a credit score. How do I build enough credit so I can get a loan?

Having no credit score isn’t necessarily a bad thing—but it can prevent you from qualifying for certain loans. Your credit score is a number that reflects how well you manage your debt and pay your bills. The higher your score, the more likely you are to qualify for loans and credit cards with good terms and low interest rates.

Whether you’re young, new to the United States, don’t have recent credit activity, or have what’s called a “thin” credit file, there are ways to turn no credit into good credit. Here are suggestions from HomeSight’s HUD-certified homebuyer education specialists:

  • Get a secured credit card. This is a type of credit card that requires a cash deposit as collateral. The deposit acts as your credit limit and protects the card issuer if you default on your payments. You can use a secured card like a regular card to make purchases and pay them off every month. This way, you demonstrate your ability to use credit responsibly and build your credit history. A secured card can also help lower your credit use ratio, which is the percentage of your available credit that you use. A lower ratio is better for your score and shows that you are not relying too much on debt. If you’re in college, you might also qualify for a college-student credit card, which helps young adults establish credit.

  • Become an authorized user. Another way to build credit is by becoming an authorized user on someone else’s credit card account, such as a family member or a friend. As an authorized user, you can use the card to make purchases, but you are not legally responsible for paying the bill. The primary account holder’s payment history, credit limit and balance will be reported to the credit bureaus under your name as well. This can help you boost your score and lengthen your credit history, as long as the account is in good standing.

  • Apply for a credit builder loan. Unlike a regular loan, you don’t get the money upfront with a credit builder loan. Instead, the lender deposits the loan amount into a savings account that you can access only after you pay off the loan in full. The lender reports your payments to the credit bureaus, which helps you establish a positive payment history. A credit-builder loan can also diversify your credit mix, which is the variety of credit accounts you have. Having different types of credit can improve your score and show you can handle different kinds of debt.

  • Get a co-signer. If you have a family member with established credit, they can co-sign a loan for you. This is risky for the co-signer, because he or she is fully responsible for paying off the loan. Failure to pay on your part could hurt the co-signer’s credit—and jeopardize your relationship.
  • Contact HomeSight to speak with one of our HUD-certified counselors. This is a free service we provide as a nonprofit lender and CDFI, and we are committed to helping every member of our community prosper. HomeSight is here to help you assess your financial present and navigate a plan for a secure future for you and your family. A credit counselor can help you go over your credit options and can help you create a personalized plan to help you take the lead in your financial life. Another bonus: speaking with a counselor and completing our free homebuyer education classes qualifies you to apply for HomeSight’s non-traditional credit offerings and down payment assistance programs. We specialize in helping borrowers with limited credit find the loans they need to achieve their financial goals. Education is power. Contact one of our helpful staff members today!