The thing is, you don’t start with good credit. You don’t start with any credit at all. Like so many things in life, it’s something you need to earn.
Thankfully, building credit is not nearly as formidable a task as some may believe. Here are a few practical ways to start building credit, even without any credit history.
Secured credit cards
At first glance, secured credit cards look and function like their more well-known, unsecured credit card counterparts. You buy what you need now then repay your balance later. Just like unsecured cards, some secured cards offer perks like cash back and other rewards.
The main difference lies in secured credit cards requiring a cash security deposit to open. That deposit, often equal to the credit limit, backs the card, allowing the credit card issuer to use it to reimburse itself should the cardholder neglect to make a payment.
Establishing credit with a manageable credit limit
Secured credit cards are generally easier to obtain than unsecured ones, making them much more accessible to those with poor or little credit history. This ease is largely because you back the card with your own money.
One thing to note: Credit limits for secured credit cards tend to be lower than those for an unsecured card. However, this actually can be a benefit because a lower credit limit can keep you from spending beyond your means, making repaying your debts more manageable.
Building a solid credit score with timely payments
A secured credit card is also more beneficial than using a debit card, in terms of building credit. As with unsecured cards, credit bureaus receive reports of your secured monthly payments. Your payment history makes up 35% of your total credit score. It’s easy to see how paying your bills on time can go a long way toward building, improving, and maintaining good credit.
Becoming an authorized user
Building credit doesn’t have to be a solo venture. Teaming up with a trusted friend, significant other, or family member and becoming an authorized user on their account is another solid option.
As an authorized user, you get a credit card with your name on it linked to that person’s account. However, the official responsibility of paying the bills falls squarely on the shoulders of the primary cardholder. As such, this can be a more accessible, less stressful way to start building credit.
Obviously, going down this path requires a great deal of trust from all parties, so consider carefully the potential consequences, good and bad, of combining your finances in this way.
Boosting your credit score through shared credit history
While becoming an authorized user gives you access to a credit card, you don’t necessarily have to use the card for it to help your credit. Credit reporting agencies consider all activity, whether yours or the primary cardholder’s, when calculating your score. In other words, their good credit is your good credit.
Learning responsible credit card use from a trusted source
You can become an authorized user on anyone’s account, so long as they add you as such, and you meet the requirements.
Even so, think carefully about whose account to join. Their card use, whether positive or negative, will directly affect your credit history. Just as good credit history can improve your score, factors like a high credit utilization rate (above 30%) or a history of late payments can harm it, even if you weren’t responsible.
Teaming up with a trusted individual, such as a parent, another family member, or a close friend, is generally one of the best ways to start building credit. Ask someone who has a good credit history and manages their finances well.
Don’t just sit back and let them do all the hard work, though. Becoming an authorized user on their credit card account presents an excellent financial learning opportunity. The primary cardholder can teach you how to use a credit card responsibly, which can set you up for success once you’re ready to apply for a card of your own.
Credit builder loans
Getting a traditional loan with little credit history can be challenging. Credit builder loans offer an alternative to those looking to establish, repair, or build good credit.
Credit builder loans work differently than traditional loans. With a traditional loan, you receive the loan amount up-front and then make repayments. A credit builder loan, which you can get from community banks or credit unions, instead requires you to make payments first.
Your lender deposits those payments, which effectively become your collateral, into an account. In many cases, you get the funds, minus fees, after you pay off the loan.
Building payment history with structured time payments
Repaying a credit builder loan is similar to repaying a traditional loan. You make regular payments toward the loan amount, plus interest, in monthly installments over a set period. Following your repayment schedule allows you to demonstrate your ability to make payments on time consistently. In turn, you get to establish a positive payment history.
Enhancing your credit report through loan repayments
Like your credit card payment history, your loan payment history factors into your credit score. It’s part of that 35% mentioned earlier. Since credit builder loan lenders report all your payments to credit agencies, making on-time payments is crucial for enhancing your credit report.
A credit builder loan can also add to your credit mix if you have other forms of credit. It accounts for 10% of your credit score, so on-time payments demonstrate your ability to handle more than one type of credit. Building this trust reflects positively on your credit report.