Build Your Credit Score

4 tips for anyone who's starting from scratch—or trying to start over

Getting your first credit card can be a challenge. Few banks will offer a regular credit card to someone without a credit history—and how do you build a credit history and establish a solid credit score unless you have a credit card? Not having a credit history creates other problems, too. It can make it difficult, if not impossible, to get a car loan or mortgage. And you may need a credit card to simply rent a car or book a hotel room. So, how can you begin to build credit? Here are four ways.

Key Takeaways

  • It can be difficult to get credit if you don't already have a credit history.
  • Some financial products can help address that problem: student credit cards, secured credit cards, and credit-building loans.
  • Finding a cosigner who already has a good credit history is another option.

1. Get a Student Credit Card

Many banks have credit cards designed specifically for college students. If you are in college, go online or check with nearby banks to see if they have any special credit card programs for students. These cards often carry lower fees and interest rates than other cards designed for first-time cardholders, and some of them even offer rewards. Making timely payments on a student credit card each month will help you establish a good credit history and a solid credit score.

Investopedia periodically rates the best student credit cards.

2. Find a Cosigner

Finding someone with excellent credit who is willing to cosign a credit card application is another way to get a credit card if you otherwise couldn't. Doing so offers a couple of other benefits, as well. For one, you’ll get a better interest rate than you could on your own. For another, you’ll get a head start on a good credit score because your score will be helped by your cosigner's strong credit history. (So be sure to pick a cosigner with good credit or you could start off with a poor credit history.)

Often parents or siblings are the best candidates for cosigners. However, both the new cardholder and the cosigner should be aware of the risks. If either of you is late in making payments, that can hurt both of your credit scores. And if one of you can't pay their share of the bill at all, the other one could be stuck with it.

3. Sign up for a Secured Credit Card

Another option for someone who is just starting out (or starting over if they've had credit troubles in the past) is a secured credit card. The way it works is that you deposit a sum of money with the lender, and that becomes how much you can charge to the card. For example, if you want a $300 credit limit, you'd need to deposit $300. 

No one can tell the card is secured; they look the same, and you use them just as you would any other credit card. The primary difference is that the bank takes no risk in issuing this type of card. You’ve secured the debt with the amount you have on deposit.

Many secured cards today have low or no annual fees. However, the interest rates can be high, so it's best to pay the balance in full each month. Doing that also restores the credit limit to its full amount. You'll also want to make sure that any card you choose will report your payments to the three major credit bureaus—Equifax, Experian, and TransUnion—to help build your credit history.

Most lenders will let you graduate to a regular, unsecured credit card in 12 to 18 months. If you’re diligent about paying your bill on time and have a steady income, you could apply for an unsecured credit card within six to eight months.

Investopedia publishes regularly updated lists of the best secured credit cards.

You can check your credit reports for free at least once a year at the official website for that purpose,

4. Take Out (and Pay Back) a Credit Builder Loan

Many credit unions and smaller banks offer loans specifically for the purpose of establishing a good credit history, often referred to as credit builder loans. These loans work much like a secured credit card, but without the card: You deposit money with the financial institution and take out a loan in that amount. As you make payments on the loan, the financial institution reports them to the three credit bureaus, helping you establish a credit history.

When the loan is paid off—typically in six months to two years—you'll get your money back with interest. And if you've made on-time payments consistently over that period, you will have built a good credit history, which will translate into a good credit score.

The Bottom Line

Getting credit can seem like a classic catch-22. You need a credit history to get credit, and you can’t establish a credit history unless you already have credit. But there are some relatively easy ways to get around this problem, including financial products that are specifically designed for that purpose.