Getting, building credit requires an income


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I am unemployed and have no credit history. I don’t have any debts, either. How can I start building up my credit score? -- Tony

Answer Dear Tony,
To create an excellent credit score, you’ll need to get an installment loan or a credit card and then use it responsibly. For an installment loan, that means sending the fixed payments on time so the balance steadily declines. If it’s a credit card, charge and pay at least the minimum requested payment by the due date (more is best, and I’ll explain why in a moment).

As soon as your installment loan or credit line is granted, you will begin to establish a credit history. There are three major credit reporting agencies in the U.S. – TransUnion, Experian and Equifax. These companies gather and organize information sent to them by subscribers, which include banks, credit unions, credit card issuers, finance companies and collection agencies, about their customers.  

As for credit scores, they are developed by other companies, with the two most common being FICO and VantageScore. Their purpose is to help lenders predict the amount of risk they take in bringing you on board as a customer. High scores are an indication that you’re a good credit risk, while low scores connote the opposite.

FICO and the most recent version of the VantageScore have the same numerical scale – 300 to 850. To get those numbers, the scoring systems delve into consumers’ credit reports on a regular basis, and input all the financial information that is listed into mathematical formulas. Some data, including a person’s payment history and debt-to-credit-limit ratio take on the greatest scoring weight. The length of your credit history, your credit mix and amount of new credit are also factors, but aren’t as critical. Recent activity is more important than older activity, too.

But how can you begin borrowing with no established credit history, no score and no earnings? That’s going to be tough. If you were working, you could probably qualify for a secured card. These products are designed for people like you who either need to fix damaged credit or create a credit profile. You would need to offer a cash deposit, which guarantees the line of credit against default. If you don’t pay for what you charged by a certain number of months, the issuer will claim the funds held in a special savings account. The credit line is usually the same amount as what you put down, but can be a little larger.

Without a job, though, getting even this type of starter card will be difficult. The issuer would have no confidence that you have the means to make payments. Unless you have some other income stream, such as a partner who contributes to the household coffers or who will also be sharing the account, it would be foolish to lend you anything. It’s not personal, it’s business.

So, your first step is to become employed. Once you have a job, save at least a few hundred dollars, then research the various secured card account options on this site. Most secured card issuers report to the credit reporting agencies, but do call and check before you apply. Select one card that looks like a correct match and wait to be accepted. When you are, use it at least once every few weeks, but pay it off in full immediately. You’ll stay debt-free, which will not just benefit your credit rating, but your bottom line. Interest is added to carried-over balances, and it’s ridiculously easy to get in over your head. Trust me on this.

In just six months of having the card, your credit reports will have enough data for a credit score to be generated. The numbers will be on the low side at first, but keep up the good work and they will escalate. 

See related: Lost job? Budget, don't stop card payments, Get through unemployment without borrowing

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Published: March 9, 2016

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Updated: 10-26-2016

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