Getting your first credit card can be a challenge. There are few banks that 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.
- You can establish a solid credit history or repair one by exploring several options
- Student credit cards are specifically designed for young people who are establishing themselves financially.
- Secured credit cards allow you to get a credit card by putting down a deposit.
- Credit-building loans can help address the lack of credit history but make sure you pay for it.
- Finding a cosigner with a good credit history can help you solidify your own credit history.
1. Get a Student Credit Card
Many banks have credit cards that are designed specifically for college students, especially those who are under 25. These cards often carry lower fees and interest rates than other cards designed for first-time cardholders, and some of them even offer rewards like points or cashback. One key feature is that they are often unsecured, which means you don't have to put down a security deposit to be approved.
If you are in college, go online or check with nearby banks to see if they have any special credit card programs for students. Some banks may even send representatives to promote their cards and banking services to students, so you don't have to leave campus.
Making timely payments on one of these credit cards every month will help you establish a good credit history and a solid credit score.
Investopedia periodically rates the best student credit cards.
The minimum amount of time it can take to establish a solid credit history.
2. Sign Up for a Secured Credit Card
Another option for someone 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, so you don't need to worry. Secured credit cards look the same, and you use them just as you would any other 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 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 not earlier. For instance, Discover's secured credit card begins reviewing accounts after seven 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.
3. Take out (and Pay Back) a Credit Builder Loan
Many credit unions and smaller banks offer loans that are specifically used to establish a good credit history. These are 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 pay down 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 consistent on-time payments over that period, you will have built a good credit history, which will translate into a good credit score.
You can check your credit reports for free at least once a year at the official website for that purpose, AnnualCreditReport.com.
4. Find a Cosigner
Finding someone with excellent credit who is willing to cosign an application for you is another way to get a credit card or loan if you otherwise couldn't. And it may help you more than you think. For instance:
- You may qualify for a better interest rate than you could on your own
- You may get a head start on a good credit score because your score will be helped by your cosigner's strong credit history
Parents or siblings are usually 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.
What Factors Affect My Credit Score?
Your credit score is a numerical rating assigned to you. This number ranges between 300 and 850 and is based on a series of factors, including your payment history, the total amount you owe to creditors, the length of time your credit history has been open, the types of credit you have, and the newness of your credit. Potential creditors use this score to determine how likely you are to repay your debts. so someone who has a score between 300 and 579 is considered a high-risk debtor. An excellent score, though, ranges between 800 and 850, which means the consumer has a very low risk of default.
What Is a Credit History?
Your credit history is the summary of your ability to repay their debts and other financial obligations. This information is compiled on your credit report, which includes all of your debts, the balances owed on each, the length of time they've been open, your payment history (whether you've made payments on time or late and how often), the number of inquiries made by creditors, as well as other information, such as bankruptcies, collection items, liens, and foreclosures. Your credit history is what helps creditors determine whether they'll lend you money.
How Do You Establish a Credit History?
There are a few ways you can establish a credit history. Consider applying for a special credit card, such as a secured credit card or a student card if you're studying full- or part-time. Some lenders offer credit-building loans, which are reported to the credit reporting agencies to help you build up your credit. If all else fails, consider asking a family member or friend who has good to excellent credit to cosign a credit application for you. If you choose this option, be sure to make your payments on time so you don't affect their credit and your relationship.
When Should You Start Building Your Credit History?
Most lenders require consumers to be at least 18 before they can apply for credit. Even if you meet this minimum requirement, you have to be fully prepared by educating yourself before signing on the dotted line. Committing to a credit card or loan means understanding your responsibilities as a debtor, which includes making payments on time. One misstep can affect all the hard work for your future. And keep in mind, many lenders require that you have a minimum amount of income in order to qualify.
The Bottom Line
Getting credit can seem like a classic Catch-22. After all, you generally 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.