New credit card companies and ways to boost your score are opening up access to credit.
It can be tricky to get a loan or open a line of credit without a credit history. It's the notorious credit-building Catch-22: You need to access credit to build good credit, but you need to have good credit to access credit.
Folks with no credit will be excited to learn that this maxim may not ring so true anymore. Thanks to new technology, lenders can now draw on additional information like your banking behavior and bill payment history to evaluate you as a potential borrower. This means that you don't necessarily need to show that you've used credit before in order to access credit.
UltraFICOTM and Experian Boost give you credit for paying the bills
Most lenders rely on your FICO® Score to make lending decisions. The problem for many consumers is that there's more to their financial picture than this score alone. And so, new services like UltraFICOTM and Experian Boost have developed algorithms that fill in some of these missing pieces with additional data.
Both services incorporate data from your bank account to provide a more holistic picture of your habits as a borrower. They make credit opportunities more accessible by expanding the information that determines your credit score.
UltraFICOTM looks at your checking, savings, and money-market accounts and considers factors like account age, balances, overdrafts, and bill payments. Experian Boost pulls payment information from your bank account for bills like utilities and telecom services, often improving your credit score if your bills are consistently paid on time.
Experian Boost and UltraFICOTM are both free services, which you can opt in to if you want these additional factors to be reflected in your credit score. They may be helpful for consumers with no credit, but they can also help push borderline consumers over the edge into good credit.
New no-fee credit cards make building credit easier and cheaper
Although the services above can give you a credit boost, they aren't going to catapult you to excellent credit on their own. Getting excellent credit requires a lengthy history of on-time payments.
One of the best ways to do this is by using credit cards strategically.
If you're starting from scratch, secured credit cards have long been the way to go. These low-limit credit cards are easy to qualify for, and will help you build a payment history. You'll need to provide a refundable security deposit of anywhere from $50 to $500.
Secured credit cards are a great starting point, but they are limited due to their security deposit requirements, low credit limits, and lack of benefits or rewards. They aren't meant to be a long-term solution -- you'll eventually want to transition to an unsecured credit card with a higher credit limit.
The great news is that secured cards are no longer the only option for consumers who need to build their credit. New credit card companies are popping up that look at alternative data (information outside of your credit score) in order to approve consumers for starter credit cards. In fact, several of the new cards geared toward consumers with no credit are even better than secured credit cards. They come with no annual fee, no security deposit requirement, and upfront terms. Some even offer rewards.
Although building your credit is important, credit cards are a serious responsibility that should only be used to pay for purchases within your means. You should also always plan to pay off your balance in full each month to avoid interest fees.
A good credit score should never cost you money either, meaning that you shouldn't have to take on debt just to build up your credit score. Instead, focus on taking small, consistent steps that move your credit score up the scale over time.
With so many new ways to build your credit, having no credit is no longer the long-term barrier that it used to be.
