Establishing credit is one of the first steps on your financial journey. Having credit allows you to secure a loan, get a credit card, rent property and more. This is why knowing how to establish credit is key to meeting your financial goals.
If you’re a young adult or student, especially between the ages of 18-21, it’s common to have no established credit at all. Building credit while you’re young can put you on the fast track towards financial freedom as long as you do your research ahead of time and build your credit responsibly.
In this article we’ll detail seven ways you can establish credit, tips for building and improving your credit score, and information on how to understand your credit report.
Read on for a full review on how to establish credit.
7 Ways You Can Establish Credit
So, you want to establish credit for the first time, but you’ve applied for a credit card or loan and have been rejected. This is more common than you think, as most people with no established credit who apply for a credit card or loan will be denied.
You must start accruing transactions that are reported on a credit report in order to establish a credit score, such as a VantageScore. Trying to establish credit can seem challenging, as many lenders won’t approve you for a credit card or loan unless you already have a credit history report. Luckily, there are other ways you can establish credit and many of them are low risk to both you and the lender. Below we list seven options available to first-time credit users and discuss the pros and cons of each option.
1. Become an Authorized User on Someone Else’s Credit Card
Get a boost on your credit history by becoming an authorized user on someone else’s credit card. This is a quick and easy way to start establishing credit, if you can find someone willing to give you access.
Adding an authorized user to an account is typically a simple process for the user, and once that step is completed you can begin using a credit card linked to the user’s account.
The downside is that if your account holder doesn’t keep up with their payments, your credit score can be negatively impacted. Even one late payment can really hurt your newly established credit score.
2. Get a Cosigner or Co-applicant
You can also get a cosigner or co-applicant on a credit card or loan. Because the cosigner will be on the hook for any money you don’t pay, this option only works if you have someone willing to take on the responsibilities that may come along with cosigning.
A common route to go is having a parent cosign a small loan for you. If you’re still in college, you could even use this loan for school expenses!
It’s worth noting that in addition to greater risk to the cosigner, this option also makes it much more difficult to remove a cosigner or co-applicant from an account, compared to removing an authorized user, for instance.
3. Get a Secured Card
A secured card prevents you from spending money you don’t have while at the same time letting creditors see that you’re in the habit of paying off a monthly bill.
This financial instrument has you put your own money down as collateral before you start spending. The deposit you put down then becomes your spending limit on the secured card.
Because you can only spend up to the amount you’ve put down, you don’t run the risk of going into debt or spending money you don’t have. Secured cards typically have low limits, such as $500, so you can’t use it for a big purchases, but it’s a great introduction to managing a credit bill each month.
4. Apply for a Student Credit Card
Student credit cards can be a great way for college students to begin building credit. They’re designed with students in mind, so you have a better chance at being approved even if you have no previous credit report. The only caveat being you have to prove that you are in fact a student at a verified college or university.
Student credit cards typically have lower balances to prevent students from building crippling debt and they can also have rewards focused on student life. For example, some cards will even reward you for good grades.
Often times, student cards also have an introductory 0% Annual Percentage Rate (APR). An APR is the interest rate you’ll pay on your credit card balance if you decide to carry it over month to month. While it’s great to get a 0% introductory rate from a student credit card, make sure to read into what the rate will be once the offer period ends, as student credit cards often have a high APR balance overall.
5. Take Advantage of Rent Reporting Services
If you’re already paying rent when you’re looking to establish credit, rent reporting services can help you get those rent payments added to your credit report. All three major credit bureaus – Experian, Equifax and TransUnion – accept rent payments as credit establishing payment proof.
You’ll likely pay a fee to a rent reporter for their service, but it can be worthwhile if you’re looking for a low risk way to establish credit on payments you’re already making.
6. Apply for a Secured Loan
Much like a secured credit card, a secured loan allows you to take out a loan with no credit history by offering up collateral. You can use various things you own, not just cash, as collateral with the understanding that if you don’t pay your loan back, your creditor can seize that asset.
Typically some banks, credit unions and online lenders offer secured loan opportunities. A secured loan is a good way to both establish credit and get a large amount of cash. Two of the most common ways to secure a loan are to borrow against your car or your savings account. As with other loans, this secured loan will probably have an APR attached to it so plan to pay interest on your loan.
7. Research Gas and Retailer Credit Cards
Gas cards and store credit cards are more lenient on approving people with low credit history. This is a great option for someone with some form of credit history who wants to continue to build upon it, rather than someone with no history at all.
Gas Credit Cards
Gas credit cards are a great way to build up your credit score with payments you already purchase regularly. If you drive a car, paying for gas is already built into your financial routine so this could be a low risk way to get in the habit of paying recurring items through credit.
Some gas cards also offer discounts per gallon, but pay attention to the interest rate offered on these cards, as it will likely be higher than gas credit cards with no rewards.
Retailer Credit Cards
Like gas cards, retailer credit cards have higher approval ratings so they are a great introduction to credit cards. Retailer cards also let you earn while you shop, and are offered by major stores such as Target and Walmart.
Pay attention to the annual APR, which will likely be high, and penalty fees before you sign on the dotted line for a retailer credit card.
How Long Does It Take to Establish Credit?
Even as you take steps to establish credit, these changes slowly build onto your credit report over a series of three to six months. For example, your VantageScore will typically begin to reflect changes after three months, where as FICO can take up to six months. Don’t lose hope, though—once a history of credit transactions begins to appear on your credit report, you’re officially establishing credit!
It can be an exciting time when your credit report begins to update with your established credit. Keep the momentum going by practicing good credit habits and continue to build your credit score. Curious about how else you can beef up your score? Read on for more tips on how to build your credit score!
How to Build Your Credit Score
Once you’ve started establishing credit using one of the methods above, you can start building your score. You want to make sure you’re making responsible decisions in regard to your credit report in order to secure the best credit score you can get, so knowing some best practices can go a long way.
Here are three tips to help you build positive credit:
1. Pay bills on time
No matter what stage your credit history is in, it’s important to always pay your bills on time. Even if you cannot pay your bill in full, making the monthly minimum will prevent negative impacts on things like your credit report.
Making a late payment can cause your interest rate to increase and your credit score to drop. It will also be reflected on your credit report and you’ll likely have to pay a late fee.
The best way to keep your credit healthy is to always make at least the minimum payment on time for any credit card or loan you have.
2. Monitor your credit card balances:
Maxing out your credit card balances can negatively impact your credit scores. While a lot of different factors play into your credit score, light use of your cards can put you at a lower risk of taking a hit to your score.
If you do have a monthly balance carry over, a general rule of thumb and good practice is to keep this balance at 30% or less of your overall credit limit if you are able to.
3. Eliminate balances when you can:
If you have numerous credit cards with small balances, consider paying them off completely to help try and improve your credit score. Having a $0 balance maintains a better credit utilization rate which will help keep your credit score in prime range.
While paying off a credit card can be good for your credit score, closing the credit card account could have a negative effect on your score. Consider keeping the card open with no balance in order to make your credit history look more reliable. If the card has an annual fee and you no longer use it, you may want to contact your financial advisor and discuss the impact of closing it.
Understanding Your Credit Report
After you’ve established credit, understanding your credit report is key to staying on top of your financial health. Monitoring your report allows you to know your standing and to make adjustments as needed, which in turn lets you get the best possible terms for any credit lines you have open or will open in the future.
There are two major credit scoring services you can get your credit score from: VantageScore and Fico. Turbo uses VantageScore to calculate your credit report. This scale rates your credit on a scale of 300 to 850.
Your VantageScore considers a number of different factors including payment history, utilization, balances, depth of credit, recent credit and available credit. Find out more on how your credit score is calculated here.
A credit score report tells you where you stand and is updated monthly. Turbo offers a free credit score report so you can stay on top of your financial health. If you use Turbo’s credit score report, you won’t be penalized for checking your report. Find out how to get a free credit score report here.
A credit check report is different than a credit score report in that it provides more detailed information about your credit finances such as the length of your accounts, payment history and how credit utilization impacts your credit score. Find out more on how to get a free credit report.
Taking steps to establish credit can be a very exciting time as it opens the doors to financial opportunities. There are many ways to start establishing credit, but the most important decision you’ll make is finding the option that works best for you.
The best way to start establishing your credit history is to do so after thorough research and understanding of the commitment you’re about to make. Turbo is here to help you every step of the way on your financial journey. Bookmark this page so you can revisit us later or check out more information on how to build credit.
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