Credit is one of life’s great catch-22s. Let’s say you just graduated from high school and want to get your first credit card. You dutifully fill out the application form and wait for a reply from the issuing bank, only to find out that you’ve been rejected. Why? You have no credit history.
But how do you establish a credit history? Well, you get a credit card, of course. It’s a frustrating conundrum, but luckily, there are a few easy and inexpensive steps you can take to establish your credit history.
- If you want to establish a credit history, check your credit report first, to make sure you don’t already have one.
- To build your credit history, consider applying for a secured credit card, a card through your bank, or being added as an authorized user to someone else's credit card.
- Once you’ve started to establish a credit history, keep it in good shape by paying bills on time and not letting your credit utilization ratio get too high.
What Is Established Credit?
Established credit is your credit history, which measures your ability to repay debts and a demonstrated responsibility in repaying them. Your credit history is recorded in your credit report, which details the number and types of your credit accounts, how long each account has been open, amounts owed, the amount of available credit used, whether bills are paid on time, and the number of recent credit inquiries from potential lenders.
Everybody has to start somewhere to establish a credit history. Here are steps to take:
Review Your Credit Report
First, make sure that you truly have no credit history by getting a free copy of your credit report. You may be surprised to discover that because of a gym membership or a student loan, you actually do have a credit history. It might be for a very short duration, but it could be all you need.
If you’ve recently been rejected for a credit card or loan, then you are entitled to a free copy of your credit report from the credit bureau that the lender used to check on you. The three major credit bureaus are Equifax, Experian, and TransUnion. Even if you haven’t been rejected for credit, you can still get a free copy of your credit report at least once a year from each of the three bureaus. You can do this through the official website, AnnualCreditReport.com.
Your credit report doesn’t include your credit score. If you want to know your score, some companies will charge you, but you can get a general idea of it by using one of the free online credit score estimating tools. Once you have a credit card, the issuer also may provide your score free of charge.
How To Build a Credit History
“Sin writes histories. Goodness is silent.” Unfortunately, these famous words from Johann Wolfgang von Goethe often ring true in the area of credit reporting. While it would seem that having no credit is a good thing because it can indicate that you’ve been financially solvent enough to pay cash for every purchase that you’ve ever made, lenders want proof that if they give you money, you won’t take it and run.
If you’ve determined that you definitely don’t have a credit history, or if the history you do have isn’t sufficient to get you approved for a traditional credit card, then here are some of your options:
Get a card through your current bank
You may not have a credit score, but if you have a checking account with a bank, that could help you get approved for a card. At the very least, you might qualify for a secured credit card. A secured card requires you to keep a certain amount of money on deposit, which then serves as the credit limit on your card. Your credit limit on a secured credit card may not be very high, but it will get you started toward a credit history.
Once you’ve established a good track record with that card, you should be able to get an ordinary, unsecured credit card.
Another option is to take out a small secured loan from the bank and pay it back over time. But unless this is the only option you have, it’s a waste of money. You’ll have to pay interest on that loan, and no matter how good the interest rate is, why pay to borrow money that you don’t even need? With a secured card, you can avoid interest charges by paying the bill in full each month.
While debit cards look and function much like credit cards, they will not help you establish a credit history.
Get added as an authorized user
If you have a spouse, parent, sibling, or close friend with a credit card with a long history of 100% on-time payments, a high limit, and a perpetually low or paid-off balance, see if they can add you as an authorized user on their account. Doing this gives you the benefit of their good credit habits.
Make sure this is someone you trust to continue having a solid payment history and that they can trust you not to run up a balance on a card they're responsible for in the end. If there's any concern, they can also just keep the card. You still get the benefits of their credit history and they don't have to take on the risk.
Apply for a store credit card
Store credit cards, offered by major retailers, generally have more lenient approval requirements. These cards often come with an account-opening bonus, such as 10% off your first purchase.
So, the next time you need to buy something from your favorite store, consider taking advantage of its credit card offer to help establish credit. Just make sure you have enough money to pay the bill in full when it arrives, as interest rates on store credit cards tend to be very high.
Finance a store purchase with an interest-free offer
Especially around the holidays, stores often let you purchase items on credit with a “same as cash” offer that charges no interest for a set period of time—usually 90 days. Since this is a type of loan, it can help you establish good credit if you pay on time. To avoid paying interest or hidden fees, make sure to pay it off completely before the allotted period expires.
Offers like this can be found both in stores and online.
How To Use Credit Once You Have It
Once you have credit, watch how you handle it so that you can keep your credit score up. That means paying your bills on time, not applying for too many forms of credit in a short time frame, and keeping your credit utilization ratio low by keeping your balance nowhere near your limit.
While it's not a necessary step to having a good credit score, setting up autopay as soon as you open the account and making sure that you set it to pay off the statement balance every month will set you up for major financial success. If you can get used to paying off all of your balances monthly you could save hundreds of thousands of dollars in interest in your lifetime.
Bear in mind that one of the factors that figures into your credit score is the length of time that your accounts have been open—longer being better. So even if you prefer to pay cash for purchases, merely keeping your credit card account open can help you achieve and maintain a high credit score.
How Do Student Credit Cards Work?
Student credit cards are cards offered by major lenders like Bank of America, Discover, and Capital One. If you are a student they are a great option to build credit. They usually offer lower interest rates and offer credit to people with no existing credit history. Sometimes they also offer sign-up bonuses, which will pay you a certain amount in points you can use for a vacation or to get straight cash back.
Does Paying Off My Credit Card Each Month Hurt My Score?
Paying your credit card off in full every month will not hurt your credit score. That is a pervasive myth. Paying your credit card off in full every month saves you from spending money on interest and can actually help your score by decreasing your credit utilization percentage.
What Is the Easiest Way to Establish Credit History?
The easiest way to establish credit history is to be added as an authorized user to someone else's account that has excellent history. If you can't find someone willing to add you to their account, then a credit card through your bank or a secured credit card are your next best options.
The Bottom Line
Having a strong credit score will not only help you next time you want to take out a loan or apply for a credit card. It also can affect your insurance rates and even whether you can rent an apartment or get a job with some employers. So establishing a credit history will be worth the effort for years to come.