You can find a lot of bad information online about how to build credit history when you’ve never used any credit before.
I’d like to tell you the best ways to start building credit. Building credit the right way takes a few months but it is easy when you follow these steps.
These strategies also apply if you’re trying to rebuild credit and improve your overall credit score.
Years ago the common credit building advice for college students and young adults with no credit was this: Become an authorized user on someone else’s credit card.
You can still become an authorized user on a friend or family member’s credit card account. But won’t help your credit very much, if at all.
Authorized users of a credit account are not responsible for paying the bill; only the primary cardholder or co-applicant will be responsible.
Therefore, authorized users do not record positive credit history when the credit card gets paid.
Nonetheless, you still hear countless people tell you this is the first thing you should do. They aren’t lying; their info is just outdated. That’s OK 🙂
When you don’t have any credit history, major credit cards like American Express, Discover, Chase, and Citi will deny your application.
But it never hurts to apply, right? Well, actually, it can hurt. The rejected applications can become part of your credit history.
Any time you apply for a credit card, the lender checks your credit. This check shows up as a hard inquiry in your credit file with Experian, Equifax, and TransUnion.
Multiple hard inquiries in a year will lower your credit score, undermining your credit building process before it gets started.
That being said, sometimes a major credit card company will send you a pre-approved offer even if you don’t have any credit. The truth is, you might get accepted.
But I wouldn’t recommend going this route. A secured credit card lets you add positive history to your credit report without risking out-of-control bills.
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You could think of a secured credit card as a debit card that builds your credit history.
With a secured credit card the lender does not extend a line of credit. Instead, you make a security deposit which you can spend via the credit card and then pay off.
Yes, you have to fund your own line of credit, but the credit card company reports your payment history to the credit bureaus each month.
So you can start building credit by making on-time payments without risking debt.
This strategy offers several advantages:
This should go without saying, but it won’t hurt to remind you: Failing to make on-time payments on your secured credit card each month will hurt your credit.
I recommend paying off the entire balance each month.
Anyone trying to establish or rebuild credit after bankruptcy should consider a credit builder loan.
This is a loan designed specifically for people building credit for the first time in their lives.
College graduates, people who are newly divorced, and immigrants who are new to the country could all benefit from a small credit builder loan.
Here’s how these loans help first-time borrowers.
With these loans, you’re pretty much guaranteed to make on-time payments month after month — which helps build 35% of your FICO score.
People with no credit history will start to see big increases in their credit scores after a few months.
People with bad credit will make slower progress because their positive payment history has to overcome existing negative credit information.
I saved this common credit building method for last because it’s my least favorite.
When you ask a parent or a friend to co-sign on your auto loan or personal loan, you’re asking that person to put his or her own credit on the line for you.
If you fail to make on-time payments, your co-signer’s credit report will suffer along with yours.
Still, under the right circumstances, this method can help you build your own credit history with the major credit bureaus.
Whether you need a private student loan, car loan, credit card, or personal loan, a family member with good or excellent credit could help you secure the loan by co-signing.
Along with getting access to the money you need, you’ll have a chance to build a positive payment history.
I recommend setting up automatic payments from your bank account or at least putting the loan’s due dates on your calendar.
Getting behind on the payments could strain your relationship with your co-signer.
When you’ve graduated from the dos and don’ts of credit building by getting a secured credit card and a credit builder loan, you’ll have a living, breathing credit file within six months.
At that point, you’re ready to fine tune your credit life so your credit score can soar.
With excellent credit, you can choose loans and new credit cards with lower interest rates and lower fees.
The best credit cards pay you to use them through rewards dollars.
Here’s how to achieve these goals:
Once you have your secured credit card account open and in use, make the monthly payment, on-time, every month.
Spend your self-funded line of credit and then pay it off. Rinse and repeat.
When I had my secured credit card I used it for only gas. This meant I made regular transactions but never over-spent.
If you already have student loans, rent payments, cell phone bills, and utility bills, pay these bills on time, too.
The FICO and VantageScore models emphasize payment history, especially on credit cards and personal loans.
If you’ve started out with no credit history, you can expect to see credit score increases within six months of making all on-time payments.
If you’re rebuilding bad credit, expect this process to take longer — possibly a couple years.
People will say you can build credit fast. This just isn’t true.
Another 30% of your FICO comes from your credit utilization ratio.
This is a fancy term that measures how much of your available credit you’re using month to month.
Someone who has spent $2,500 of a $5,000 line of credit is using half his or her available credit. This credit utilization ratio would be 50%.
Most personal finance experts recommend keeping your credit utilization rate below 30%. I’d go as far as saying 25%.
Once you exceed the 30% threshold, FICO and VantageScore start to lower your credit score.
A credit utilization rate approaching 100% will really start dragging down your credit score.
This rule applies best to revolving credit accounts like credit cards and overdraft protection lines of credit.I
t’s a lot harder to control the balances on installment loans.
Along with paying down balances, you can help your credit utilization rate by keeping a few unused accounts open.
If you’ve paid off a Visa and plan to close the account, for example, consider keeping the account open but not using it.
Having a card with a 0% credit utilization rate looks really good in your credit history. Once again, your credit utilization rate fuels 30% of your credit score.
So you know that 35% of your FICO comes from payment history and another 30% from credit utilization. That’s 65%. What about the other 35%?
The time you spend building credit will pay off well into the future only if you keep a good credit history by protecting your credit profile.
Here’s how:
Identity fraud is so prevalent in the 21st century. A data breach or stolen credit card could wreck your credit fast.
Financial institutions have increased their security measures in response, but you still have to take responsibility for monitoring your own credit so you can detect problems before they become disasters.
Fortunately, there are many ways to monitor your credit, including several free tools.
First, you can get free copies of your actual credit reports by visiting annualcreditreport.com.
Or, you could get a free credit score from apps such as Credit Sesame and Credit Karma which track your VantageScore. (Your VantageScore often resembles your FICO score.)
These apps can alert you about possible fraud. At that point, it’s up to you to take action to freeze your credit and investigate the problem.
If you want more robust protection, the three credit bureaus have subscription-based credit monitoring and identity theft services.
I like TransUnion’s program and have also heard good things about Experian Boost.
If your credit report shows a sudden decrease, you may have inaccurate negative items pulling down your credit score.
Sometimes lenders report late payments inaccurately. Or they don’t update Experian, Equifax, and TransUnion when you’ve paid off your balance.
Occasionally people have accounts on their credit report that they never opened because a lender sent in the wrong Social Security number or mixed up some similar names.
You can dispute inaccurate negative items with the credit bureaus, and you can ask the lender to correct the mistake.
Removing inaccurate negative information from your credit report can resuscitate your score quickly. Monitoring your credit reports helps you detect these kinds of problems early.
You learned about good payment history habits with your secured credit card, but a secured card’s low “credit limit” won’t teach you much about self-control.
When you’ve been successful building credit, you’ll suddenly have access to large available credit limits on multiple cards. You could have $30,000 or $50,000 in available credit.
If you dive too deeply into these credit limits, you’ll soon have dead weight pulling on your good credit history in the form of a high credit utilization rate.
Your minimum payments won’t put a dent in your balances, and your credit card issuers will start piling on the finance charges at high interest rates.
At this point you’re vulnerable. A setback like a big car repair or lost wages from an illness means you may have to make a late payment or miss a payment or two. Then the late fees and punitive interest rates kick in.
You see where this is going. Many credit scores have been decimated by late payments that lead to credit card charge-offs and collection accounts.
Avoid overspending!
Now you know the elements of your FICO score and tools you can use to build credit history.
It’s time to use this knowledge by putting it all together.
Building credit is all about building momentum. Every month is a new opportunity for the credit bureaus to receive positive information about you.
Month after month, and year after year, layer by layer, your credit history will grow a little stronger. Then, the components of your credit score start working together, interdependently, in your favor:
You can see where this is going. Momentum.
I wish you all the best luck and let me know how it works out.
Also, if any of you want to share your experiences, please do so below!
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View Comments
Thanks for this information!
They have $50 deposits with CapitalOne if you cant afford $200-$500. That is a bit steep.
Hi Ryan,
I'm an 18 year old college student in the process of attempting to secure my trip to Rome in the summer and I need loads of advice. I was going to attempt to get a credit card with free flyer miles with purchases over 1000 dollars on the card in the first 3 months etc. However, I checked my credit score for the first time (assuming I might have at least SOME credit because my student loans are in my name), but my credit is very poor! In the 500 range poor. HOW COULD THIS HAPPEN?? I've never had to make payments on anything, I don't have a credit card currently, the only thing in my name is my deferred student loan! What do I do??? I know I would never get a big name card like the AmEx Gold Delta SkyMiles card, (which is really what I need), and I don't want to have my parents put their name on it instead because then I won't be building credit. Any advice??
I am a college student paying for my own tuition, rent, phone bill, etc. While for the average working adult $200 doesn't seem like a lot- it does to a Ramen-noodle-every-night, struggling college student. However, I want to purchase a car in a decent amount of time without ridiculous interest bearing payments. Is $200 really the minimum payment I should be making to establish good credit? What would be MY best option for establishing credit in my case?
The $200 is just the amount you'd deposit in the secured credit card account.
Thanks for the article. It has given me some good insight. I've been debating if I even want a credit card, but I know establishing good credit history could benefit me in the long run. A secured credit card really sounds like a sound idea since I'm depositing my own money. Does this mean, I need to deposit more money every month to maintain usage and its limit?
You don't have to deposit more money each month... You can open the card with, say $200 - $500 and that should be enough to start building some good credit as long as you pay it off each month.
I lived off grid for past 11 years, i have 0 credit. I am dissable now and i get 750 mo. I have a child to rase and my rent is 700. I do not drive, own a car, never will. I can NOT aford 500 or 200 or even 1. Never will hapon. I have a prepaid card but they dont report. There must be other ways to build credit. For a laymon. So far this system is desinged to keep the poor poor. I have good refn, but no one cares, i pay my bills but no one cares. When will this cycle end?
Im just wondering how you plan on paying your credit card payments if you don't have the money to pay what you borrow? That's a very important thing to think about. They are going to see that and you might wanna try CapitalOne . They gave me a $200 limit with a deposit of $49. Im on my way to building my credit. Just a thought, if you ever get a chance of getting a credit limit. You should use that to invest in a way to generate a second income. Good luck and best of wishes for you and your child.
I didn't know authorized users didn't help your credit score anymore. Thanks for the great info, Ryan!
Sure, thanks for reading.