How to build credit

Without credit, it may be difficult to get approved for loans or credit cards. Lenders like to see at least some credit history to help determine your likelihood to pay back the credit they extend. If you’re looking to secure a credit card, car loan or home mortgage loan—or hope to do so in the future—experts recommend building your credit as early as possible to achieve a good credit score.

Methodology: In putting this list together, we consulted with renowned credit experts Barbara Friedberg and 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 to find out the most effective ways to build credit from scratch.

6 ways to build credit

1. Apply for a secured credit card: One of the easiest ways to start building credit is to open a credit card. Experts recommend using a secured credit card to begin to build credit. A secured credit card is similar to a standard credit card––you use it to buy things, and you incur interest when you don’t pay the full amount. The difference is that you need to put down a cash deposit to obtain a secured credit card. The deposit is generally the same amount as your credit limit, and you’ll get it back in full when you close the account, provided you made your payments on time. By requiring a deposit, issuers can provide a secured credit card to individuals who have little-to-no credit, making it ideal for those just starting to build their credit.
   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 fully documented.
2. Become an authorized user: A credit cardholder can add authorized users to their account. An authorized user is anyone outside of the primary cardholder who is approved to use the card. With this method, you get the benefits of the positive credit history without having to be approved by the card issuer. As an authorized user, you are not legally obligated to pay the bill, as that responsibility lies with the primary cardholder. 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. Sending boundaries is critical. The good news is, you can get the benefit of being an authorized user without ever having to actually use the card. Simply being listed as an authorized user will give your credit the same boost.
3. Get a cosigner: If you have limited income, consider asking your parents or another trusted adult to cosign on a credit card for you. This can be a good way to establish good credit without putting down a deposit for a secured card.
   Only take this route if you’re sure you can pay your credit card on time. Whoever cosigns is responsible for making payments if you neglect to, and their credit score will take a hit if you are negligent.
4. Take out a credit-builder loan: Talk to your local community bank or credit union to see if they can offer you a credit-builder loan. These loans are specifically designed to help people build credit and don’t require good credit for approval. Lenders report your activity to the major credit bureaus, so as long as you make payments on time and in full, they can help build your credit history by demonstrating your responsibility in paying a loan back. Look for a loan with a monthly payment you can easily afford and that has a relatively short repayment period, so you aren’t stuck with a loan for years on end.
5. Rent-reporting service: Use a rent-reporting service such as Rental Kharma or RentTrack to take the rent you’re already paying and put it on your credit report. Most landlords don’t report rent payments to the credit bureaus on their own. A rent-reporting service is a good way to build credit without a credit card.
6. Take out a student loan: 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. Plus, student loans show up as separate loans for each disbursement. So if you go to school for four years and take out student loans every semester, you will have eight different loans on your credit report, even though you might only make one payment to one loan agency to repay.
   Student loans can be 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 credit card debt.

5 good habits that help build credit

There isn’t a quick fix for raising your credit score. It takes time and discipline. Here are five good habits that will help you build your credit:

• Only spend what you can pay: Put yourself on a budget, and build some savings in a separate account for months when you do overspend.
• Always pay on time: Paying your bills and making credit payments on time is one of the best ways to improve credit. Setting up reminders or automatic payments can help.
• Diversify your debt: You want more than just credit cards on your credit report to demonstrate your ability to pay back multiple types of debt. Auto loans, student loans, mortgages and personal loans are examples.
• Don’t open too many accounts at once: Several new accounts popping up at once can lower your credit score.
• Keep accounts open: Keep accounts open as long as possible, even once you pay off the credit. This will increase your credit length history, which impacts your score.

If you’re having financial trouble and difficulty paying your bills, contact the credit card company or lender and explain your situation. A legitimate credit counselor can also help.

How long does it take to build credit?

After beginning the process by opening a credit account or securing a loan, you will have a VantageScore credit score in three months. It takes six months to secure a FICO score.

Fortunately, it doesn’t take too long to build credit, if you’re starting from scratch. With good habits, you’ll be well on your way to a good credit score in no time. Remember, it takes longer to fix poor credit than it does to build credit, so build credit the right way and make sure you’re building toward a good score by developing responsible spending habits and making smart credit decisions.

When should you start building credit?

The sooner you start building your credit history, the better. If you’re 18 or older and don’t have a credit history yet, today is a great day to start. Parents can make their children authorized users at any age, which means kids can start building a credit history long before they turn 18 and get a head start on their credit.

Bottom line

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 on time, and start building credit early. With options like credit-builder loans and secured credit cards, starting your credit history can be a simple and painless process. If you don’t have a credit history yet, today is a great day to start.