How to build credit

The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009 restricts anyone under the age of 21 from applying for an unsecured credit card, which means people between the ages of 18-20 have a difficult time building the credit they need to buy a home or car or to simply pay for living expenses.

The good news is that there are ways to build credit if you are one of the 25-50 million “invisible” citizens who are off the grid because you are under the age of 21, you are a recent immigrant to the United States or you have actively chosen to avoid building a credit history until now. It is also possible to build your credit score up if yours is low due to high credit card debt, defaulted loans or a history of late payments that have been sent to collection agencies.

Who this guide is for
This guide will be useful for the following groups of people:


I put this guide together so that you can make educated choices about building your credit and your credit history. I consulted with renowned credit expert John Ulzheimer, The National Foundation for Credit Counseling’s Vice President of Public Relations and External Affairs Bruce McClary, and consumer credit expert and author of The Debt Escape Plan Beverly Harzog. In addition, I read dozens of articles on the topic and reviewed federal laws regarding credit cards and credit reporting to find out the most effective ways to build credit from scratch as well as to learn the most effective ways to raise your credit score so you can get better interest rates and get out of debt.

Why good credit matters

Sure, you can use cash or checks for things like groceries and clothes, but what about a car or a house? Large ticket items that cost more money than you have in the bank will require a loan, and to get a good loan with a low interest rate, you need to have good credit. To have good credit, you need to demonstrate a history of paying back your debt on time. Payment history makes up 35 percent of your credit score, so demonstrating that you can pay your credit card bills and/or loans on time is a great way to build good credit. But how do you start?

It might seem counterintuitive to say that you need good credit in order to get more credit, but it’s actually quite simple. Lenders want to loan money to people they think can pay them back. Having no credit history makes it hard for lenders to estimate the likelihood that you will keep to your end of the bargain, resulting in higher interest rates and potentially lower loan amounts. If you have bad credit, lenders will you as “high risk” and charge higher interest rates or refuse to lend you money at all. You want to build your credit responsibly so you will have good credit that will help you get good interest rates when you are ready to make a major purchase.

4 ways to build credit if you're under 21

1. Secured credit cards
You don’t need to have a credit history to get a credit card. McClary recommends a secured credit card as a good place to start building credit history. A secured credit card is similar to a normal credit card––you use it to buy things, and you will incur interest when you don’t pay the full amount. The difference is that you need to put down a cash deposit on your secured credit card. The deposit is generally the same amount as your credit limit, and you will receive it back in full when you close the account, provided you made your payments on time.

McClary considers an unsecured credit card to be “a stepping stone,” rather than an end point in your credit history. Over time, using your secured card responsibly will raise your credit score and get you to the next level of credit––the unsecured credit card. According to McClary, there is not a specific amount of time that needs to pass before you can get an unsecured card, and he advises that borrowers “have to be comfortable with the idea that it will take awhile” to build their credit history when using a secured credit card. He also says that borrowers should not assume that they are going to immediately transition from a secured credit card to an unsecured credit card with the best interest rate. However, the interest rate you get from an unsecured credit card once you have established your credit history will be better than what you were getting from your secured card.

To get the most out of your secured card, look for one that reports to all three credit bureaus so that your credit history will be documented. Once your credit history has reached a point where you can transition to an unsecured credit card, call your creditor to negotiate new terms. In addition to calling your current creditor, McClary advises borrowers to shop around for an unsecured credit card that will offer a lower interest rate along with rewards for use.

2. Become an authorized user
An authorized user can use a credit card account but isn’t the primary cardholder, giving them access to a credit card for purchases with the added bonus of building credit.  If you become an authorized user, spend responsibly. You are not legally obligated to pay the bills as an authorized user, but charging more than the primary cardholder can afford to pay will put a dent in their credit and in yours. Parents can sign their children up as authorized users at any age, but they should feel that their children are responsible enough not to overspend and risk putting the whole family’s credit into jeopardy.

3. Get a cosigner
If you are a college student and/or have limited income, you might consider asking your parents or another trusted adult to cosign on a credit card for you as a way to establish good credit without needing to put down a deposit for a secured card. Be aware that there are risks for the cosigner, so be prepared for the person you ask to say no.

Ulzheimer says that he will never advise anyone to take on the role of cosigner because of the potential negative impacts that can result if the credit card holder becomes delinquent. Whoever cosigns is responsible for making payments if you personally neglect to, and their credit score will take a hit if you are negligent.

4. Take out student loans
You need to have a credit history established to get certain types of loans such as auto loans and home loans. However, student loans are a different story. Ulzheimer explains that student loans show up as separate loans for each disbursement. So if you go to school for 4 years and take out student loans every semester, you will have 8 separate loans on your credit report, even though you might only make one payment to one loan agency.

Ulzheimer maintains that student loans are an effective way to build credit, provided you make payments on time. Delinquent student loans will drop your credit score, and it is much more difficult to rebuild your credit score when you have defaulted loans than when you have massive credit card debt. McClary warns that defaulting on your student loans can make it increasingly difficult to get other types of loans down the road, including auto loans and mortgages. Talk to your lender about payment options if you cannot make their suggested payment rather than skipping a payment. If you do wind up defaulting, speak to a credit counselor immediately to see what your options are to rebuild your credit.

Things that don't help your credit score

Utility payments
There are some websites that advise parents to put their kids’ names on household utility bills as a way to build credit. However, as Ulzheimer notes, utility bills only get reported to the credit reporting agencies when they go into collections, making this option basically pointless.

Debit cards
Even though they work like credit cards, debit cards are tied to a bank, and banks don’t report to the credit reporting agencies. Using a debit card, therefore, will not help you build your credit. If you are trying to build credit, you are better off keeping your money in the bank and using it to pay off a secured credit card.

When to start building credit

If you are 18 or older and haven’t yet started building your credit, today is a good day to start, provided you have enough cash to pay off what you put on your credit card. Parents can make their children authorized users at any age, but that doesn’t mean they necessarily should. Ulzheimer says that parents should add their kids as authorized users “as early as absolutely possible.” He suggests that parents let their kids swipe the credit card, then show them the statement so they have an understanding of how a credit card works and what happens if a bill isn’t paid in full or on time. This way, your kids will have a long credit history when they are old enough to get their own credit cards.

McClary, on the other hand, is more wary of giving children access to credit cards earlier than the age of 18. In the end, McClary notes, it is up to the parents to decide if their children are ready for the responsibility that comes with being an authorized user. Spend time during your children’s pre-adult years educating them on what credit is, why it matters and how they can make sure they have good credit as adults. When you think they are ready, add your children as authorized users.

How to keep good credit

You’ve gone through all the steps, and you have established a good credit score. Now what? Here are some ways to keep the good credit you have established:

Only spend what you can pay
A lot of people fall into a trap of putting more on their credit card than they can pay off, thinking that their good credit history will be able to withstand the debt they incur. The truth is, you need to stick to the good habits you have established that earned you good credit in the first place. Putting too much on your credit card will increase your debt-to-income ratio, making it harder to get loans when you need them. Put yourself on a budget, and build some savings in a separate account for months when you do overspend.

Take out loans
Having a credit card is a good place to start building credit, but you shouldn’t stop there. McClary says that people need to “diversify what’s reporting to their credit file,” meaning that you want more than just credit cards on your credit report. Auto loans are a good way to demonstrate that you are capable of paying off multiple lines of credit. However, don’t take out an auto loan just to raise your credit score, especially if you have enough cash to pay for it upfront. You’ll end up with interest payments that will likely be more than it’s worth to get your score up a few points. Student loans are another way to raise your credit, but only if you pay them back on time.

It’s important to note that you should only take out loans if you need them and if you can pay them back. It is not a good idea to take out loans just to build your credit score.

What to do if you have bad credit

“There is no one road to bad credit,” says Ulzheimer, so there is no one way to repair your credit score. According to Ulzheimer, it takes longer to rebuild credit than it does to build credit, but that doesn’t mean it’s impossible to raise your score. Just know that it isn’t going to happen overnight. Here are three things you can do if you have bad credit:

1. Talk to a specialist
Ulzheimer acknowledges that “it’s hard to wade through” all the options out there for rebuilding your credit if you are trying to do it on your own. To that end, it might be helpful for you to seek professional consultation.

There are a lot of legitimate professionals out there who can help you rebuild your credit score, but choosing the right one for you will take some research. Reading consumer reviews is a helpful way to figure out whether or not a debt consolidation company is right for you. Both Ulzheimer and McClary recommend starting with non-profit agencies which provide credit counseling and financial education services at a price their clients can afford.

2. Pay off credit card debt on time
“It can take as little as 30 days” to raise your credit score if you have credit card debt, according to Ulzheimer. This is because paying off some of your credit card debt will impact your debt-to-income ratio, which is one of the factors that can bring down your credit score. People with a higher debt-to-income ratio are more likely to have problems making their monthly payments, meaning they are a higher risk for lenders. Making a commitment to lower your credit card debt is a relatively simple, and quick, way to improve your credit score in a short amount of time. Harzog adds that “the most practical way to build credit is to pay all of your bills on time. Payment history makes up 35 percent of your FICO score and this is something everyone can do to improve their credit score.”

3. Clean up judgments and collections
Judgments and collections on your credit history will have a major impact on your credit score. McClary recommends paying off any judgments and/or collections that are currently on your credit report immediately if you want to raise your score. These records will remain on your credit report for a period of time, but once they are paid your report will reflect that you no longer owe money on them.


Whether you are building your credit from scratch or trying to rebuild your bad credit, you have a lot of options. The best way to build a good credit score is to be responsible. Only take out loans and credit cards that you can pay back (and on time), and start building credit early. If you have a low credit score, give yourself some time to build it back up. Talking to professional credit counselors who can customize a financial plan for you is a great way to rebuild your credit and get out of debt. Make sure to check out all the reviews on to find the right credit counsling agency for your needs.

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