Updated June 5, 2019

How to Build Credit for the First Time

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Building credit without credit is not impossible. Here are 7 smart ways to establish credit for the first time.

What You Need to Know

If you're trying to build credit, you understand the Catch-22: You need a credit card to build credit, but you can't get a card without good credit.

The truth is, you need credit for just about everything you do:

But don't worry, everyone starts out from nothing. Read about several ways to build credit from scratch in our guide.

UNDERSTANDING THE BASICS: WHAT IS A CREDIT SCORE?

A credit score is the most important 3-digit number in your financial life. It tells a lender if you're likely to pay back a loan.

If your score is bad, lenders will be less willing to give you the loan. Or they may charge a higher interest rate, which could translate into thousands of dollars more over the course of the loan.

Here are the factors that determine your credit score:

  • Payment history (35%): Whether you pay bills on time and/or carry a balance.
  • Credit utilization (30%): The amount of credit you're using compared to the total you've been given.
  • Length of your credit history (15%): How long you've had credit accounts and activity.
  • Types of credit (10%): The kinds of credit you have (credit cards, car loan, student loan, etc.)
  • New credit (10%): Number of inquiries and/or new applications for credit.

Age, occupation, income, employment history, and marital status don't impact your credit score. But a lender may take these things into account when deciding to offer you a loan.

You Should Know: Lenders may access one of two different credit scores:

FICO Score, the most popular credit score, was developed by the Fair Isaac Corporation.

Vantage Score was formulated by the three major credit bureaus (TransUnion, Experian, and Equifax).

HOW BUILDING CREDIT WORKS

Lenders use your credit score to assess your ability to pay back a loan. So the only way to build credit is by paying back loans.

In other words, you can't just have a checking account and pay for everything in cash. This may mean you're debt free, but it won't build a credit history. You need to show that you can pay back loans responsibly.

Two types of accounts will help you build credit:

  • Revolving credit lines: These are credit cards, open-ended lines of credit that allow you to keep borrowing as you pay (up to your limit).

    Making rent payments is a good way to build credit, especially if you pay consistently and on-time. RentTrack explains why you should consider reporting your rent payments to all three credit bureaus.

  • Installment loans: These types have fixed monthly payments. They include things like a student loans, car loans and mortgages.

Ideally, you want a mix of both credit lines and fixed loans. This shows the credit bureaus that you're capable of managing different types of debt.

Tip: Keep tabs on your credit.

You can order one free credit report from each of the 3 credit bureaus every year. Visit annualcreditreport.com to get started.

Using Credit Cards To Build Credit

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Without any credit, it's very hard to get approved for a credit card. But there are some ways to get plastic in your wallet to start building credit. Keep reading to learn how.

SECURED CREDIT CARDS

A secured credit card is one of the best and fastest ways to start your building credit. You won't need a credit history to obtain a secured credit card.

Follow these steps to get started.

  1. Put down a security deposit. This reduces the risk to the lender in case you don't make your payments. You'll then receive a credit card with a set limit (usually the amount of your deposit).

  2. Use your secured credit card to make purchases. Make sure you stay within your credit limit.

  3. Pay off the monthly bill regularly and on time. If you don't make the payments, the lender can choose to withdraw money from your deposit to cover the defaulted amount.

You Should Know: If you have no outstanding balance and are in good standing, you can get your security deposit back when you close your account.

Secured credit cards report to the 3 major credit bureaus to help you build (or re-build credit) through responsible use. The concept may sound like a pre-paid card to you, but pre-paid cards don't report to credit bureaus.

The downside of secured credit cards is that you'll need to save up money first. For a $1,000 credit limit, you'll need to provide a $1,000 deposit. And you won't get that money back until you close the account (assuming you have no outstanding balance).

Check out our top recommended secured credit cards.

Part of financial responsibility is understanding how credit cards work in the first place. 360 Payments explains what you should know about how information passes from your card to the credit card processor.

STUDENT CREDIT CARDS

For college students, a student card is a good way to start building credit. Just about all major card issuers offer student cards. But some will require a parent co-signer (someone who agrees to be responsible for your debt).

Generally, student cards have a lower credit limit. This can be helpful because it prevents overspending.

TIP: You should only your student card for necessities and emergencies.

Think of it as a "starter card." If you use it responsibly, you can build credit that will make easier to buy a car or rent an apartment later. Check out our top student credit cards.

BECOME AN AUTHORIZED USER

This is perhaps the easiest way to start building credit. Simply ask to become an authorized user on the account of another person (like a parent or guardian). You will get a credit card with your name (but the same card number) to use for purchases.

Of course, this agreement requires a lot of trust. As an authorized user, you are not responsible for payments. Only the main account holder is obligated to pay the balance. So don't go wild with your spending.

Becoming an authorized user can help - or hurt - your credit, too.

  • If the card owner has good payment habits, it will boost your score.

  • If the account owner is often late with payments or only pays the minimum, then your credit score could take a hit.

NOTE: Make sure your authorized user status is reported to the credit bureaus BEFORE you sign on as an authorized user.

Some card issuers don't report authorized user activity, which will do absolutely nothing for your credit.

MAINTAIN GOOD CREDIT CARD HABITS

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When building credit, the MOST important thing is to use your card responsibly. This means:

  • Never miss a payment. Missing payments puts a serious dent in your credit score. Plus, many credit cards have a penalty rate of 29.99% that kicks in after a late payment.

  • Pay off the entire balance each month. If you can't pay off your card, it sends a message to lenders that your income cannot support your spending habits.

    If you do run into a cash flow issue some months, pay off as much as you can (never just the minimum).

  • DON'T max out your credit. Again, this tells lenders that you spend more than you can afford. Try to keep your credit utilization at around 30%.

    This means that if you have a $2,000 credit limit, don't use more than $600 of it at any time. Even more ideal is to keep it under 20%.

TIP: Advocate for yourself.

If you make timely payments and regularly pay off the entire balance, call your bank and ask for a credit line increase. With a higher limit, your credit utilization is lower - this can help your score.

But remember to keep your usage the same even after you've gotten an increase.

Building Credit With Loans

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The second way to build credit is through installment loans. Some options include:

STUDENT LOANS

If you took out a student loan to pay for college, you're already on your way to building credit. Student loans are considered installment debt, which means they're reported to the credit bureaus.

You don't need a credit score or a parent co-signer to take out a federal student loan for education. As soon as you begin paying back the loan (on time, of course), you'll be building credit.

TIP: Report your rent payments to build credit.

Typically, landlords don't report your rent to credit bureaus. But with services like Rental Kharma or Rent Reporters, you can build credit for paying your rent. Here's how they work:

  • You fill out an application with your past rental payment information.
  • They verify that you have been paying rent on time through your landlord.
  • They then report your rent history to the credit bureaus.

Note: These services do have a fee.

CREDIT BUILDER LOAN

Credit unions or community banks typically offer these loans, which are designed to help you build credit in a safe, responsible way.

No credit score is required though there is a small administrative fee. You get a loan in a secured savings account that you pay back in installments.

Self Lender is an online company that offers credit builder loans. Here's how it works:

  1. You choose the loan amount.

  2. Self Lender lends you the money in a 1-year CD account in your name.

  3. You make set monthly payment to repay the loan.

  4. At the end of the year, you finish paying off the loan and can access your money (including the interest earned!).

While this may seem the same as you depositing money into a savings account, Self Lender reports to all three credit bureaus every time you make a payment. As such, the transaction is considered an installment loan and shows that you are able to make timely payments.

This method of building credit is safe and responsible. There's no danger of overspending and then getting stuck with interest that you can't pay off. And at the end of a year, you'll have established credit AND a nice little savings fund.

CAUTION: Before applying for a credit builder loan, make sure you can make the monthly payments (and on time).

If you cannot, the late and default payments will be reported to the credit bureaus and damage your credit.

CO-SIGN A LOAN

Without credit, you'll need a co-signer to take out the loan with you. This is a person who agrees to pay back the loan if you default.

As long as you have a co-signer with good credit, you'll most likely get the loan with no problem.

But there's a catch: the co-signer becomes liable if you're late with your payments. This can hurt their credit. And if you default on the loan, the debt becomes their legal responsibility.

TIP: Don't take out a personal loan for the sole purpose of building credit.

Loans come with interest rates AND origination fees (the cost to process the loan). So you'll be paying extra even as you repay the loan. Only take this route if you actually need the loan, like when you're buying a car.

BOTTOM LINE

There are a lot of ways to build credit responsibly, whether it's through a secured credit card, credit builder loan, or with the help of someone you trust.

When establishing credit, remember to always make your payments on time and pay off the entire balance on your credit cards. Be patient and your credit will grow (or improve) over time.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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