How to Build Your Credit: 6 Strategies to Establish Credit History

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There are a number of tools that can help you improve your credit score, including credit cards, credit builder loans and third-party payment reporting apps. Everyone has to start somewhere, so here are your options if you need to start building credit from scratch.

Key takeaways

Establishing a credit history now can make it easier to be approved for new credit accounts in the future and may also enable you to receive better loan terms.
There are tools that can help you build credit from scratch, like secured credit cards and credit builder loans.
Alongside opening new credit accounts, practicing good credit habits can help you improve your score over time.

6 strategies to start your credit history

If you’re ready to start building your credit from scratch, here are six simple ways to go about doing so.

Open a credit card
Become an authorized user
Report bill payments
Consider taking out a loan
Use a cosigner
Work on your credit mix

1. Open a credit card

Most people’s first entry point into building credit is opening a credit card, and there are specific credit cards that are best for building credit. You likely won’t have a huge credit line out of the gate, but using your card regularly and responsibly is a great way to start building a strong credit score.

Of course, “responsibly” is the key word. When it comes to credit scores, most lenders use the FICO Score, which is calculated based on five different areas: payment history, amount owed, length of credit history, new credit and credit mix.

The biggest factor in this mix is your payment history, which means you’ll need to do everything you can to pay your bills on time, every time. Be sure to make at least the minimum payment, but for best results, make small purchases and pay them off in full every month.

Secured credit cards

Lenders are more willing to issue secured cards to those with no credit history, as they require a security deposit as collateral. The amount of the deposit is typically equal to your credit limit — for example, if you put down a $300 deposit, your credit limit would be $300. It’s low risk for the lender, but it allows you to demonstrate responsible habits and build credit.

You’ll generally get your deposit back if you pay off the balance and close the card. In some cases, you may even get upgraded to an unsecured card with the same lender after demonstrating responsible use.

Student credit cards

Getting a credit card while you’re a college student may be easier as some banks, credit unions and other issues have credit cards specifically designed for college students. These cards usually have credit limits on the lower side, but they’re worth considering if you’re eligible and able to keep up with your studies and your payments.

2. Become an authorized user

If you have a close relationship and mutual trust with someone (like your parents), you can ask to become an authorized user on one of their accounts to help your credit. Once you’re added, the monthly behavior on that account, like on-time payments, will be reported on your credit report as well as theirs.

While it’s up to you and the original cardholder to work out how payments will be made and divided up, as long as they’re made on time and consistently, you can quickly build good credit. Of course, on the flip side, missed payments can hurt your credit score as well as theirs — and likely damage your relationship with the original account holder, too.

3. Report bill payments

If you’ve been making regular payments for things like rent, utilities or a cellphone plan, you may be able to get credit for them. These types of payments aren’t typically included in reports to the three major credit bureaus, but as long as you’re making them on time, you may be able to use them to boost your credit score. Credit where credit is due, right?

Third-party services can help get your bills, like rent payments, factored into your credit score. For example, Experian Boost will link your accounts so that on-time payments for utility, phone and rent payments are reported.

4. Consider taking out a loan

Taking out an installment loan, or a loan where you receive a lump sum of money and make regular payments on both the principal and interest, can also be a smart way to establish a credit history.

This is because the credit bureaus factor your credit mix, or the different types of credit accounts on your credit report, into your overall credit score. Still, it’s essential to borrow responsibly, which means borrowing to meet your financial needs and only borrowing as much as you can afford.

With that in mind, here are a few different types of loans to consider:

Secured loans

Secured loans work similarly to secured credit cards. However, in this case, you’ll apply with a lender rather than a credit card issuer. Still, the loan will be backed by collateral, such as a savings account, which reduces the level of risk for the lender and allows it to offer relaxed eligibility criteria.

As a result, secured loans are often easier to qualify for than unsecured options. However, the drawback is that if you’re unable to keep up with your payments, the lender is allowed to take possession of your asset.

Credit-builder loans

As the name implies, credit-builder loans are designed specifically to help people build credit. Typically offered by smaller banks and credit unions, they’re a type of secured loan where you have to put down money up front in order to receive any of the funds.

Say you take out a $500 loan. You won’t receive $500 to spend, but rather you’d make regular payments on that amount — principal and sometimes interest — which are kept in a locked account. Once you’ve paid the full amount, you receive the funds.

The loans are typically on the smaller side — less than $1,000 — and you may have to pay a fee in addition to your deposit. However, your deposit may also accrue interest, which can offset the fee. The biggest benefit to these loans, however, is that your (hopefully on-time) payments will be reported to the credit bureaus, and you’ll begin to build your credit score.

Auto loans

If you need a car to get to work or school, taking out a small auto loan can be a smart way to start to build credit. Here, the vehicle itself acts as the asset that secures the loan.

If you’re thinking of going this route, try to save up for a sizable down payment, as that can help make your monthly payments more manageable.

Student loans

Meanwhile, if you need money to cover educational expenses, student loans could also be an option to help start your credit history. However, since both federal and private student loan delinquencies will likely be reported to the credit bureaus, it’s crucial to only borrow an amount that you can afford.

5. Use a cosigner

To improve your chances of being approved for a credit card or loan, you may want to consider using a cosigner with a good credit score. This person essentially vouches for you with their good credit history and agrees to pay off the loan if you’re unable to do so.

Since the cosigner is on the hook for the debt, you want to make sure you don’t spend beyond your means and fulfill your obligations. If you don’t, you risk damaging your credit, their credit and your relationship with them.

This won’t directly improve your credit score, but on-time payments on a credit card or loan you’ve used a cosigner to get can.

Review our list of the best personal loans with a cosigner.

6. Work on your credit mix

Over time, as you gain more experience with credit, it may make sense to open a few different types of credit accounts, including revolving credit, like credit cards, and installment credit, like personal loans and mortgages. Credit mix makes up 10% of your overall FICO score and measures your ability to effectively manage both kinds of accounts.

That said, move slowly with this one. While it’s a good idea to build a diverse credit profile over the long haul, opening too many accounts at one time can actually harm your score and it’s important to make sure you can manage your current payments before taking on new debts.

Why building credit matters

Is building credit really that important? Yes, if you ever want to buy a house or a car. Or if you ever want to rent an apartment, get a cellphone plan or even get a job. All these things become more difficult — if not impossible — if you haven’t established credit.

When it comes to big purchases (think a car or a home), unless you have loads of cash to pay out of pocket, you’re going to need a loan. Not only does your credit history affect your ability to get a loan, but it also affects the terms of your loan, like the interest rate you’re given. In addition, landlords and employers often check applicants’ credit history to see how reliable they may be, and utility companies may do so before hooking up services to your home.

When you have no credit history, you’re classified as “credit invisible,” and it’s up to you to build a credit score. And while neither is ideal, most experts say that being credit invisible leaves you only in a slightly better position than if you have bad credit.

Speaking of bad credit: As you start establishing credit, you’ll begin moving the needle on your credit score, which can open access to bigger loans, better mortgage rates and even better cellphone plans — if that needle moves in the right direction. Delinquent payments and defaulting on loans can drag your score down to a level that can be difficult to recover from.

How to improve your credit score

As you move out of the cloak of credit invisibility, you want to build credit that’s seen in the best light — that means building a strong credit score. Here are some guidelines to help boost yours:

Pay your bills on time. Your payment history is the biggest factor that influences your credit score. It accounts for 35% of your FICO Score. Make sure to pay at least the minimum payment amount by the due date, but aim to pay off your bill in full whenever possible.
Use some of your credit, but not too much. Your credit utilization ratio (how much of your credit limit you’re using) is another big factor considered when calculating your credit score. A too-high ratio can drag down your score. Experts recommend keeping your credit utilization ratio below 30%, though you should aim to keep it as low as possible.
Open new accounts sparingly. Don’t go gung-ho with your approach to building credit and take out every loan you can. Part of your score is based on the length of your credit history — however, your credit score goes down every time you apply for a new loan, as doing so brings down the average age of all your accounts.
Dispute possible credit report errors. Make sure you review your credit report regularly for errors — you can get copies of your reports for free from each of the three major credit reporting companies once a week at AnnualCreditReport.com. Be sure to dispute any credit report errors immediately.
Keep old accounts open. As discussed earlier, the length of your credit history impacts your score. Make sure it’s as long as possible by keeping your longstanding credit accounts open and current to see a positive impact.
Be patient. Improving your credit score won’t happen overnight, but be patient. If you practice good credit habits, you’ll start to see positive change over time. With a little hard work, it’s possible to get your score in the excellent range eventually.

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