Building credit with no credit history: 6 easy steps

As a credit newbie, it can be frustrating to hear the saying, 'to get credit, you need to have credit.'

Credit history is necessary for most milestones in life, such as buying a house or leasing a car. However, if your credit score is low or nonexistent, you may face difficulties in getting approved or may have to pay higher interest rates. Additionally, most credit cards require credit history to qualify, with only a few cards designed for people with no credit.

If you lack credit history and want to establish credit, CNBC Select offers six strategies to consider.

6 steps to building credit with no credit history

1. Become an authorized user

Becoming an authorized user on a family member's or friend's credit card is a fast and simple way to establish credit history. As an authorized user, you can benefit from the primary account holder's credit and build your own credit profile. Additionally, you have no liability, making this a low-risk option. Plus, you may receive perks such as airport lounge access as an authorized user.

Before becoming an authorized user, ensure that your family member or friend has a good credit history and uses their credit card responsibly. This will prevent any negative actions from appearing on your credit history and hindering your efforts to build credit.

To avoid accruing debt on someone else's card, it is crucial to establish a repayment plan for any purchases made with the card.

2. Apply for a secured credit card

Secured credit cards are a great way to build credit if you have none. These cards are typically easier to qualify for if your credit history is poor or non-existent. And you can use a secured card just like a traditional (aka unsecured) credit card to help you establish good credit, as long as you practice responsible credit behavior.

A secured card is similar to an unsecured card in that it offers a credit limit, interest charges, and rewards. However, the key difference is that you must make a security deposit to obtain a line of credit. The deposit amount usually starts at $200 (though it can be as low as $49), and it often becomes your credit limit. For instance, if you deposit $200, you will receive a $200 credit limit.

The Discover it® Secured Credit Card is our top pick for secured credit cards due to its cash back, welcome bonus, and no foreign transaction fees, all without an annual fee. After seven months of account opening, Discover will review your account and may transition you to an unsecured line of credit, returning your deposit.

3. Get credit for paying monthly utility and cell phone bills on time

Experian offers a free and easy-to-use tool for building credit without a credit card.

By making timely payments for monthly utility, cell phone, and streaming service bills, you can increase your credit scores. Qualifying streaming services include Netflix, HBO, Hulu, Disney+, and Starz.

To link your bank accounts for utility and cell phone payments, verify the information and add it to your Experian credit file. This will instantly provide you with an updated FICO® Score and a free Experian credit report. Discover how Experian Boost works.

4. Take out a credit builder loan

Your credit score is heavily influenced by your payment history, which accounts for 35% of your score. By consistently making payments on a credit builder loan, you can develop positive payment habits that contribute to a strong credit score in the long run.

A loan that aids in credit building is available, and it is effortless to obtain, drawing in borrowers with minimal credit background.

Unlike traditional loans, these loans involve your lender depositing the loan amount into a savings or CD account that you cannot access until the loan is repaid. This makes it easier to get approved for these loans since they are less risky than typical loans. After repaying the loan, you receive the money back and sometimes a portion of the interest you paid. You typically have between six and 24 months to pay off this type of loan.

If you have difficulty making timely payments on a credit builder loan, it could negatively impact your credit score. Therefore, before taking out a credit builder loan, consider whether you are capable of meeting the payment terms.

5. Keep a close eye on your credit utilization

The credit utilization rate is calculated as the percentage of total credit utilized. For instance, if your credit limit is $10,000 and your balance is $2,000, your credit utilization rate is 20% ($2,000/$10,000 = 0.2 x 100 = 20%). Experts generally advise maintaining a credit utilization below 30%, and most consumers with excellent credit scores have credit utilizations below 10%.

It is advantageous to remember that maintaining low credit utilization is a sound financial practice and signals to lenders that you are a responsible borrower. Your credit utilization rate is the second-most significant factor in calculating your credit score. To improve your credit score, you should strive to use as little of your credit limit as possible, although it is not necessary to aim for a credit utilization rate of 0%.

You can reduce your credit card utilization by opening multiple credit cards and increasing your total credit limit, in addition to decreasing your overall spending.

6. Make small purchases and pay them off quickly

To increase your credit score, you don't need to make large purchases and pay them off immediately. Instead, using your credit card on small purchases and making timely payments can help build credit momentum, even if you're on a tight budget. Credit bureaus favor on-time and ahead-of-time payments, even for small balances.

How long does it take to build credit for a beginner?

Achieving a good credit score may take longer if you're starting from scratch, but the major credit scoring models generally require only two to six months of credit activity to generate a credit score.

It's possible for minors to start building credit before the age of 18 by being authorized users on someone else's credit card.

How to check your credit score for free

No one begins with the same credit score, as the lowest FICO® score is 300, but most individuals start higher.

Even if you don't have a credit card, you can still access these free credit score resources.

• TransUnion's VantageScore is available for free through American Express's MyCredit Guide, regardless of having an American Express account.
• Capital One offers a free VantageScore from TransUnion through CreditWise, without requiring a Capital One account.
• Chase Credit Journey: Free VantageScore from TransUnion (No Chase account required)

Bottom line

To build credit if you have no credit history, consider the following strategies.

• Gain access to a family member's or friend's card by becoming an authorized user.
• A secured credit card is typically the simplest type of credit card to obtain.
• Experian Boost™ can help you improve your credit score by reporting timely payments of certain bills.
• Consider applying for a credit builder loan, which is typically the simplest loan to obtain.
• Ensure that your credit utilization remains below 30% when you open your first credit card.
• Pay off small purchases on your credit card quickly

Building credit with no history can seem challenging, but it's achievable with a few easy steps. Start by considering a credit card that's ideal for establishing credit.

Why trust CNBC Select?

Our goal at CNBC Select is to deliver top-notch service journalism and in-depth consumer advice to our readers, enabling them to make well-informed decisions with their money. Each of our personal finance articles is the result of thorough reporting by our team of expert writers and editors, who possess extensive knowledge of personal finance products. At CNBC Select, we are committed to maintaining our journalistic standards and ethics, even though we earn a commission from affiliate partners on many offers and links.

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To learn about the rates and fees for the Discover it® Secured Credit Card, please visit this link.

Not all users will receive an improved score or approval odds, as some lenders may not use Experian credit files or scores impacted by Experian Boost. Additionally, results may vary, and not all payments are boost-eligible.