How to Start Building Credit

Having good credit can go a long way in making your life more financially secure. But unlike knowing how to breathe, you aren’t born with it. But you can have help getting it from your mama 😉 Read on to find out how…..

How “credit worthy” you are is determined by your credit score. A number calculated and determined by the 3 major credit bureaus based on 5 main factors. 

Having good credit can mean qualifying for more financial products (hello, home buying) and at lower interest rates. So having a good credit score can actually save you money. On the flip side having poor credit – can cost you money.

Now let’s dive into how you can build credit when you don’t have any….

How to Establish First Time Credit

There are lots of ways you can establish credit, because there are lots of different kinds of credit. And your first step to establishing credit will depend on your situation.

For example, if you have a parent or someone else that has good credit and is willing get in “financial bed” with you, then that’s probably your best first step. 

If not, you’ll want to likely look at some sort of secured loan or secured credit card.

Before figuring the best move for you, it’s important to understand the different types of credit.

Types of Credit

While you’re likely familiar with hearing about credit cards and student loans as types of credit, there is a better way to group types of credit by:

• Revolving (ex. A credit card – you may carry a balance from month to month)
• Installment (ex. A car loan)
• Open (ex. A charge card – required to pay off in full every month )

While there are lots of different types of credit cards, they all fall into the category of “revolving” credit, a home equity line of credit would be another example.

Installment loans are for a set amount to be paid off in a designated amount of time. Car loans, student loans, and mortgages, all fall into this category.

With an open line of credit there is no credit limit, but you are required to pay off whatever you spend in full every month. So you would have to make sure that you only spend what you can afford to pay off at the end of the month. A charge card is an example of an open line of credit and while it won’t impact your credit utilization (one of the factors impacting your credit score), it will help so long as you make all your payments on time, as payment history is the largest factor in determining your credit score.

Options for Establishing Credit

While applying for credit (any type) is one way to start establishing credit, you likely won’t qualify for many products because financial institutions won’t know if you’re good about paying back what is loaned to you.

But there are options to get credit even if you have no credit history, the most common is a secured credit card or loan. 

Secured Cards & Loans

Secured cards and loans are a way to show that you are responsible when it comes to your money. They require that you provide an asset or deposit to “secure” the loan.

In the instance of a secured credit card, you provide a security deposit and then that is the limit set for the credit card. By making payments on time every month, you’re building out your payment history as well as credit utilization, both of which factor in to your credit score.

The benefit of using a secured card rather than just using your debit card is that the credit card companies report to the credit bureaus every 30-45 days (Experian). Ensuring that your secured card is on your credit report and used when calculating your credit score.

A secured personal would work the same way, requiring some sort of security deposit before you can qualify for the loan.

And because these types of credit are secured with your money, there are programs out there that don’t require a credit check. Perfect for those wanting to establish credit.

Our recommended secured credit card is the OpenSky® Secured Visa® Credit Card, it has a low annual fee of just $35, the benefits of Visa, and requires no credit check.

As of writing this article, the APR is 17.39% which is below the average for “starter cards” – those helping to establish credit (USnews). Learn more about the OpenSky® Secured Visa® Credit Card here.

Becoming an Authorized User

Becoming an authorized user on someone else’s credit card is like piggy backing on their established credit. 

In order for this to be of the most benefit for you, you’ll want to become an authorized user on an account with a long history of on-time payments.

The account holder has to agree to have you on their account as an authorized user, and many people might be reluctant to do this because ultimately they are responsible for the bill, not the authorized user.

Once an authorized user, a card will be created with your name on it, you and the account holder will want to agree ahead of time to what extent if any you’ll actually use the card.

The benefit of being an authorized user in building your credit is that it helps with your “credit age” so using the card is not necessary for it to help build your own credit. That being said, not all cards report authorized users to credit bureaus, you’ll need to ask the card issuer beforehand.

Open a Joint Account

While being an authorized user can help you to build credit, the responsibility ultimately lies with the account holder. As such, being an account holder will do a lot more to help you build credit.

With a joint account, both account holders are each responsible for the account. If one party decides not to pay, the other party is still 100% responsible for the credit card balance. So if the relationship between the parties changes, then sharing an account could prove difficult.

To remove an account holder from the joint account, both parties have to agree so opening a joint account is not something to take lightly.

But if you are opening a joint account with someone that has more established credit it can open up opportunities for you to get access to credit cards with more favorable terms (lower APR, no annual fee, etc.)

Remember because you are an account holder, the credit card will only help with building your credit/getting a good credit score if you practice good financial habits.

Including but not limited to:

• Paying bills on time
• Keeping the credit utilization ratio (balance on the credit card) low, or better yet paying it off in full every month.

These good financial habit go towards building your payment history, credit utilization, and total accounts. The longer the joint account is open the more it can help with building the age of your credit history.

People Also Asked:

Check out some of the other commonly asked questions when it comes to building credit from scratch.

Does paying monthly bills build your credit history?

It depends how you do it. Paying your rent and utilities on time, while good to do because your landlord likely doesn’t report to the credit bureaus, won’t have an impact on your credit score.

However, using a credit card to pay for other subscriptions, such as your gym, Netflix, HelloFresh, and then paying that credit card on time will help.

Do joint credit cards affect both credit scores?

Yes. While joint account holders both hold that card, they may as individuals have other credit accounts, and therefore different credit scores. How well the joint account is managed will impact each score individually.

Can you have credit before 18?

Yes, while you won’t end up with a credit score until you’re 18 in most cases, you can start building your credit history. A common practice is for parents to add their child as an authorized user on an account. For example, have them as an authorized user on a credit card they can use for emergencies.

Can you pass a credit check with no credit history?

It depends, a credit check looks at credit history and if you don’t have one, you’ll need to work with whoever is wanting the credit check (a potential landlord for example) if you can provide an alternative way to demonstrate you’re good about paying your bills.

What is the credit score for someone with no credit history?

If you have no credit history, then you don’t have a credit score. Credit scores range from 300-850 and you won’t get a score until you start establishing credit.

How to start building credit without a credit card?

You can start to build credit without credit cards by getting a secured loan or a credit-builder loan. A secured loan requires you to offer up collateral to secure the loan. A credit-builder loan requires you to pay back the loan before you can access it. Basically you make require automatic payments that will result in you having savings. 

How old do I have to be to get a credit card?

You have to be at least 18 to get a credit card but can become an authorized user as a minor. The minimum age required to be an authorized user varies by credit card companies but usually ranging between 13-16, with some having no minimum age requirement.

Additionally the Credit CARD Act of 2009 has made it more difficult for those under 21 to get a credit card without either a co-signer or showing that they have the financial means to repay the credit being extended. This was in response to credit card companies aggressive tactics to get college students to sign up for credit cards.