The roughly 50 million American consumers who either don’t have credit history or have a limited record are in luck.
In recent years, many financial services companies have come out with programs to establish and build credit for those who have struggled to access the traditional banking system. There are even ways that people can build credit without having to take on debt.
“There have never been more ways to build your credit, and that’s a really good thing,” said Matt Schulz, LendingTree’s credit card expert. “Lenders want to find ways to help people build credit.”
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Having a credit score is important because without one, it can be difficult to get loans. Many Americans rely on mortgages, car loans and other debt to build wealth. It is also necessary in many places to have a solid credit score to rent an apartment.
“There’s a growing knowledge that a lot of people have been shut out of the traditional credit system,” said Ted Rossman, a senior industry analyst for CreditCard.com.
Here’s what consumers should know about building a credit score in a nontraditional way.
Where to start
Before attempting to establish and build credit, it’s a good idea to check and make sure you don’t have a credit report at any of the three major reporting companies — TransUnion, Experian and Equifax — said Schulz.
“There’s a possibility that they may have a credit report and not even realize it because they might have been a victim of identity theft or fraud,” he said. If you already have an established report, it may have mistakes that you need to clear up.
Of course, having a report on file doesn’t mean you have a credit score — some 21 million consumers don’t have enough information on it to have one. Still, making sure the information is accurate is an important first step that can help you build a solid score.
Using a credit card or loan
Perhaps the easiest way to get a credit score is to be added as an authorized user on the credit card of someone who already has an excellent track record, said Howard Dvorkin, CPA and chairperson of Debt.com.
Of course, that’s not an option for many Americans. If you’d still like to have a credit card but don’t qualify because you lack a credit history, a good way to start is with a secured credit card, if you’re someone that already has a bank account with some savings.
Unlike most traditional credit cards, which are unsecured, a secured card requires you to put a deposit down first. If you have $250 to put down, you’ll generally get a $250 line of credit.
“That’s a good kind of training wheels way to get into both building credit and getting comfortable using a credit card,” said Schulz, adding that secured cards minimize risk factors because the money to pay the line off is already in the bank.
Similarly, you could opt for a credit builder loan, which is often available at credit unions and smaller banks. These are loans that you’ll pay for in installations and receive the money at the end. Making timely payments will boost your credit score.
“You’re making the payments and putting a little bit of money down to get the process started,” Schulz said.
Pull in other payments
There are also services now that allow you to pull in other monthly payments you make to show creditworthiness.
In late January, Experian launched a product called Experian Go that allows users to create a credit report and score using any lines of credit already in your name, such as a car or student loan. In addition, people can use Experian Boost, which lets users add payments such as cell phone bills, utility bills and streaming services such as Netflix and Hulu to their Experian credit report.
“It’s a really fast way for a consumer to not only build a credit profile but then establish a credit score very quickly and instantly,” said Experian consumer business president Jeff Softley.
Other services also let you pull your monthly rent payments into your credit report, which could boost your score. Some come with fees while others are free, especially if your landlord uses it, as well.
“For many people, that’s their biggest monthly expense, and it’s not usually reported on credit reports,” Rossman said.
What to avoid
There’s one key thing to avoid while building credit, regardless of what route you choose: missing payments.
While it takes time to get a good credit score, your progress can be quickly erased if you miss just one monthly payment. If you’re using a credit card or other payments to build a score, Dvorkin recommends putting the bills on autopay to ensure you don’t miss any.
In addition, if you’re going to start the credit-building process, understand that it takes time and discipline, and it pays to have some financial basics, such as a solid budget, in place. After six months to a year of making on-time payments, you can check your credit report and scores.
“Usually, it takes at least six months for you to see any chances in your credit score, no matter what you do,” said Kate Hao, founder and CEO of Happy Mango Credit, a financial services company. “Be patient; building up a credit score takes time.”
Experts also said that people should do their research about what path makes the most sense to them, and look at free options first. While there are some programs that boost scores for a fee, such as eCredable Lift, which works with Transunion, it’s also possible to improve your credit without any cost.
“There’s no reason to pay to build a credit report or score,” said Dvorkin.
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