How to Fix Unestablished Credit

Paying with cash won't build your credit score, but using credit cards can.

Paying with cash won't build your credit score, but using credit cards can.

Whether you're a college student or an adult who has always lived on a cash basis, having no credit can sometimes be worse than having bad credit. A lack of a credit history can keep you from buying a house or getting a car loan. Your credit score fluctuates based on several factors, but if you have not established a credit history at all, lenders have no way of knowing how well you manage your finances. Building your credit score from scratch takes time and patience.

Pay your bills on time. Even if you don't have credit cards to pay, make sure your utility bills and rent are paid promptly. Late bills can be sent to collections, and collection agencies often report to the credit bureaus. Once you secure credit, whether it's a loan or a credit card, prompt payments are reported to the credit bureaus monthly, raising your credit score. Late payments that lower your score are also reported, usually after a grace period. One late payment isn't likely to derail your credit-building efforts, but consistent late payments create a pattern of behavior that may cause creditors to deny your request for a loan or line of credit.

Apply for a secured credit card. A secured card requires you to deposit a cash collateral that's equal to your credit limit. Most secured cards have an annual fee as well as a monthly interest rate on purchases not paid in full. This may sound like you're being charged to borrow against your own money, but what you're really paying for is the opportunity to build your credit. Secured credit cards report your on-time and late payments to the credit bureaus, so every on-time payment helps you build your credit score. When you've had the card for several months, try applying for a non-secured card. When you close your secured card account, you get your collateral back.

Apply for a student credit card if you're in college. These are usually unsecured cards, meaning they don't require collateral, but they often have low balances and limitations on how you can use them. For example, some may be school specific and allow purchases only on campus. The card owner reports your payment history to the credit bureaus.

Keep your credit card balances to less than 30 percent of your available credit. You should use your credit cards and make at least the minimum payments each month, but don't let the balance get close to your credit limit. Your credit score is based in part on your utilization of your available credit. If you're consistently near or over your limits, it's a sign to creditors that you are having trouble living within your means and that you're a high risk. It's better to have several open credit card accounts with low or no balances than one credit card that is close to its limit.

Visit a local credit union or bank to apply for a loan after you've spent several months making credit card payments. An installment loan helps build your credit quickly. Ask for a short-term loan of a small amount, such as $1,000. Make your payments on time, and you are doing two things: raising your credit score and building a relationship with the bank. Once they see you have a history of paying them on time, they are more likely to offer you larger loans, such as a car loan, in the future. Credit unions and local banks may have more flexibility in their loan decisions than nationwide banks. If they see you have a low credit score but a credit history that's only six months long, they may still grant your loan application if all your payments are current.

About the Author

Based outside Atlanta, Ga., Shala Munroe has been writing and copy editing since 1995. Beginning her career at newspapers such as the "Marietta Daily Journal" and the "Atlanta Business Chronicle," she most recently worked in communications and management for several nonprofit organizations before purchasing a flower shop in 2006. She earned a BA in communications from Jacksonville State University.

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