How to Start Building Credit

Did you know that 26 million Americans don’t have a credit history with any of the major credit reporting agencies? That’s nearly one in every 10 adults, including many who are young and just getting started with their adult lives, and others who have avoided credit in favor of cash transactions.

Without an established credit history, it can be difficult to get any type of loan—yet you can’t have a credit history without first having a loan. It can feel like a tricky chicken-and-egg situation. Fortunately, there are several options you can consider to jumpstart your credit profile. Before we dive in, let’s first review some credit basics.

How your credit history, credit report, and credit scores fit together

Any time you apply for credit, the lender will gather information about you to decide if they want to lend you money, how much, and at what interest rate.

To accomplish this, lenders will often access your credit report. Your credit report is a statement of information about your credit history and current credit situation. It contains details about current and past, including the amount you borrowed and your payment history.

Lenders aren’t the only ones who look at your credit report. Employers and landlords, for example, can also check your credit as part of their due diligence process.

Credit scores are calculated based on your credit report. There are multiple companies that calculate credit scores, including FICO and TransUnion. Each three-digit score is based on a different model, so your scores might vary across providers. Lenders often consider your credit score in conjunction with your credit report.

If your credit report is a blank slate and your credit scores are nonexistent, here are four ways you can start establishing a credit profile:

1. Use a secured credit card – To open a secured card, you’ll first deposit money with the lender. Then, you can charge up to a certain percentage of that amount. It’s called a “secured” card because your deposit acts as security: If you don’t pay your bill, the lender can draw against the money you deposited. The goal is to eventually convert the secured card to a standard, unsecured credit card.
   
   Before you open an account, be sure the lender will report your payments on the secured card to the major bureaus—not all of card issuers do, which means you wouldn’t be building your credit history.
    
2. Get help from another person – If you’re applying for a credit card or loan but have no credit history, a co-signer can help. Co-signing is a big deal, though: Both you and the co-signer are legally on the hook to repay the debt. As such, most people turn to close family members, spouses or partners as co-signers.
   
   Similarly, you could ask a trusted person to add you as an authorized user on his or her existing credit card. You’ll be allowed to make charges on the card and build up your credit profile, but you aren’t legally obligated to pay for the charges. On the other hand, if the primary account holder falls behind on payments, your credit can be hurt.
    
3. Consider credit builder or student loans – If you’re a student without a credit history, you could look into federal student loans from the U.S. Department of Education, many of which don’t require a credit history. The first step is to apply for federal aid via the free FAFSA form. Education can be expensive and student loans can be burdensome; as with all forms of debt, be sure to weigh the decision carefully.
   
   Another option is a credit builder loan. Typically offered by credit unions and community banks, these are small loans of a few hundred to $1,000. First, the lender deposits the full amount into a savings account, then you make regular payments toward the loan over the next six months to two years. These payments are reported to the major bureaus, which helps establish your credit. Once you’ve paid the full amount, you receive the accumulated money as a lump sum.
    
4. Report your rent payments – You can often build your credit history by making on-time rent payments. Ask your property owner or landlord if your on-time payments are reported to the major bureaus. Oftentimes, landlords choose only to report late payments as a way to encourage delinquent tenants to pay up, and don’t bother reporting on-time payments. If that’s the case, check out intermediary services like RentTrack, RentReporters or PayYourRent to harness the power of your on-time payment history.
    

How long does it take to establish credit?
Once you’ve opened an account or been added to an existing account, your payment and balance activity will start to be reported to the major bureaus within 30 days. Generally, it takes at least three months and often six months of activity before a credit score can be calculated.

Be smart about your new credit
One you start to establish credit, be sure to use it wisely and work toward building a strong credit score. Key factors include:
 

• On-time payments – A healthy record of on-time payments is an important factor in a positive credit history and strong credit score.
• Credit utilization ratio – Your credit utilization ratio represents the percentage of your available credit that you’re using. For example, if you have credit card balances totaling $4,000 and your credit limits add up to $8,000, your utilization ratio would be 50%. Your credit utilization ratio accounts for about 30% of your FICO score, making it a highly influential factor. Most experts recommend keeping your credit utilization ratio at 30% or less. That applies to the ratio for each individual card, and for your utilization across all cards.

Credit scoring companies also want to see that you can responsibly handle multiple types of credit. So, if you’re successfully managing a credit card, you may consider taking out a new type of credit, such as an installment loan. Making on-time payments on different types of debt can bolster your score.

If you’re striving to build better money habits, RISE is here to help. Check out our free, interactive tools for setting savings goals and managing debt, and stay tuned to our blog for more tips on building a healthy credit profile.