August 6, 2024 |6 min read
Credit is important. And having good credit can make it easier to rent an apartment, take out a car loan and buy a home, among other things. But it can be hard to know how to establish credit for the first time.
Luckily, there are several ways to establish credit. The general idea behind each strategy involves building a solid history with responsible credit use over time.
What you’ll learn:
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Opening a credit card, becoming an authorized user and applying for a credit-builder loan are some ways to establish credit.
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Building good credit relies on using credit responsibly by doing things like making on-time payments every month and maintaining a low credit utilization ratio.
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To establish a FICO® score, you’ll need at least one credit account reporting to at least one of the major credit bureaus for at least six months.
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You could get a score from VantageScore® the first time your new account gets reported to the credit bureaus.
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Understanding credit for beginners
Before you start building credit for the first time, it can be helpful to understand some credit basics.
Your credit history is the record of how you handle your money and debt. It includes information about your loans and credit card accounts collected by the three major credit bureaus: Experian®, Equifax® and TransUnion®. When credit bureaus receive that information, they add it to your credit reports.
To calculate your credit scores, credit-scoring companies like FICO and VantageScore apply mathematical formulas or models to the information in your credit reports. Lenders use your credit scores to estimate how likely you are to repay your debts on time.
If you have no credit history or a thin credit file, it’s difficult for credit-scoring companies to generate a credit score for you. And if lenders can’t see a credit score, they might not be willing to extend you credit.
How to start building credit: 6 tips
There are a number of ways to start building credit, whether you’re a college student, an immigrant to the U.S. or simply someone who’s new to credit.
Here are six tips to help you get started.
1. Apply for a starter credit card
One way to establish credit is to apply for a credit card. But without a credit history, it can be difficult to get an unsecured credit card. There’s another option known as a secured credit card. With a secured card, you make an initial security deposit that’s held by the credit card issuer while the account is open.
If you choose a secured card that reports the account holder’s card activity to at least one of the three major credit bureaus, you could start building a successful track record. That means doing things like using your card responsibly and making on-time payments.
When you’re ready, some credit card companies may allow you to graduate to a traditional card without closing your original line of credit. The process may even involve returning your deposit.
Other starter card options for building a credit history include credit cards for college students and credit cards for those with no credit history.
2. Become an authorized user
Getting added as an authorized user to the credit card account of a trusted family member or friend is another way to build credit. As an authorized user, you’re allowed to make purchases but the primary cardholder is responsible for the account, including making payments. Some issuers, like Capital One, may also provide a separate card and online access for eligible authorized users.
If the card issuer reports the card activity of authorized users to the credit bureaus, a user may be able to benefit from the primary cardholder’s credit history. But negative actions, like missed payments, could affect the credit of both the primary cardholder and the authorized user.
3. Set up a joint account or get a loan with a co-signer
Much like becoming an authorized user, setting up a joint account or getting a co-signer on an account could also give you access to credit. The biggest difference is that in those cases both account owners are responsible for making payments.
Keep in mind that late payments or other negative actions could affect the credit of the joint account owner or co-signer as well as your own, just as they might if you were an authorized user.
It’s also worth mentioning that most major credit card issuers don’t allow co-signers.
4. Take out a credit-builder loan
Financial institutions like credit unions and community banks may offer credit-builder loans. These small loans, which can range from about $300 to $1,000, are designed to help build credit history.
With a credit-builder loan, the lender deposits the loan amount into a locked savings account. Over a fixed period, the borrower pays it back with relatively small payments. Because the lender reports payments to the credit bureaus, credit-builder loans can help establish credit. And once the loan is paid off, borrowers get access to the money in the savings account.
5. Prioritize responsible use of your credit lines
Responsible use of your card could include keeping your credit utilization ratio under 30%. Another good credit habit is to consistently make on-time payments. That can reflect well on your payment history, which is one of the factors that affects your credit scores.
6. See whether paying your bills could help
You may be able to build credit just by paying your bills. In recent years, some companies have developed alternative scoring methods. These new methods consider information not typically used in credit reporting such as rent, car insurance and phone bill payments as well as bank account transactions.
How long it takes to establish credit
If you’re just starting out, you’ll need at least one credit account open and reporting to at least one of the major credit bureaus for at least six months to generate a FICO credit score. FICO scores are used by 90% of top lenders.
With VantageScore, you can get a score as soon as the first time your new account gets reported to the credit reporting agencies.
But there’s no one-size-fits-all answer to how long it takes to build credit. Building good credit takes time, and there are no shortcuts. The good news? You could get one step closer to improving your scores every time you use credit responsibly.
How to monitor your credit
Once you’ve established credit, consider monitoring your progress and credit scores.
CreditWise from Capital One can help you better understand your score. It’s a free tool available to everyone, and it provides a personalized summary of key factors that may affect your VantageScore 3.0 credit score.
Another way to stay on top of your credit is to check your credit reports. You can get free credit reports from all three major credit bureaus at AnnualCreditReport.com.
Key takeaways: How to establish credit
There are a number of ways to establish credit. But whether you’re using a secured credit card or becoming an authorized user, it’s critical to use credit responsibly.
Ready to start building credit? Compare Capital One’s fair and building credit cards and see whether you’re pre-approved online today with no harm to your credit score. Some cards even offer the ability to earn rewards for using your card.
