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How to establish credit for the first time

Here's a how-to guide on establishing credit for the first time, but first, it's helpful to know the basics:

What is credit?

Credit is basically a loan of money, and comes in many different forms. Credit cards are among the most common types of credit offered to consumers. What kind of credit card you can get will depend on your credit score. The higher it is, the more creditworthy you are in the eyes of lenders.

How are credit scores calculated?

There are a few different providers of credit scores, the most common being VantageScore® and FICO®. VantageScore typically looks at six factors when calculating your score.

Factor

% of your
credit score
 

What it looks at:


How you can improve this
part of your credit score:
 

Payment history 40%


Have you consistently met
debt payments on time for
previous credit cards or loans?
 

Pay your bills on time.
 
Length of credit history 21% The average age of all of your
current open accounts.


Keep your accounts open
and in good standing for a
long time.

Credit usage 20%
Your credit utilization rate,
or how much debt you owe
vs how much credit available
to you.
 
Keep your credit card balance
at less than 30% of the card's
total credit limit.
Total balances 11% This is the total amount you
owe and includes all reported
balances.

Paying your total balances
off regularly and reducing
outstanding debt is usually
in the best interest of your
credit health.
 
Recent credit 5%


Number of recently opened
credit accounts and credit
checks by lenders.
 

Only open loans and lines of
credit that you really need.
 
Available credit 3%


This is the amount of unused
credit that’s currently available
to you. It’s the difference
between your credit limit
and balances –across all of
your accounts.
 

Adding more open lines of
credit could improve your score
in the long run, just make sure
you only open accounts that
you really need.
 

How is your credit score used by lenders?

VantageScore and FICO credit scores range from 300 to 850. The closer your credit score is to 850, the more likely lenders will think you'll pay them back. And the lower the perceived risk of doing business with you, the lower the interest rate you could pay on credit card balances or be charged for a loan.

How do you build credit for the first time?

It sounds like a classic Catch-22: you need credit to get credit. But there are ways people can build credit for the first time:

Use a family member or trusted friend's good credit

If you have a family member or trusted friend who has a good credit score, you might consider one of two things:

Have them co-sign a loan

Some lenders will allow someone with a strong credit score to co-sign your loan, which effectively means they've used their score to earn the loan's approval. But that also means the co-signer is liable to pay the loan if you can't, and their credit score could be affected by any late payments you make.

Get added as an authorized user

Ask a family member with a good credit score range—or anyone who trusts you, for that matter—to add you as an authorized user of one of their credit cards. When the individual adds you as an authorized user, that account will be added to your credit report, and all on-time (and off-time) payments by the primary will be reflected on your credit report. Additionally, all on-time payments by the primary cardholder will add to your good payment history from then on.

You will get a credit card to use, with your name on it, but the statement still goes to the primary cardholder. That means you will need to come to some agreement with your trusted friend or family member on how you will pay them for your card use.

Use secured loans or secured credit cards

For borrowers with low or no credit, secured loans or secured credit cards allow you to minimize the lender's risk by providing money up front as a deposit. This deposit will usually match your credit limit, although in some cases, your credit limit may be lower than your initial deposit. If you're looking to go the secured credit card route to establish your credit score, you should double-check that the secured credit card you're applying to reports to the three credit reporting bureaus, Equifax®, TransUnion® and Experian®.  You should also consider that secured credit cards may charge annual fees and interest rates and you should take this into account along with the security deposit.

By carefully weighing your options, you may be able to figure out if a secured credit card is best for your current financial situation. You may also be able to find secured credit cards on the market that charge low interest rates or waive annual fees, so be sure to look through many secured credit cards to find the best one for you.

Secured loans

When you're approved for a secured loan, the amount of the loan is placed with the lender as a collateral, which you can't withdraw until the loan's paid off. By consistently making payments on time, you can demonstrate your responsible use of credit and drive up your credit score.

Secured credit cards

Once you place your deposit (which can be between $300-$500), secured credit cards are ready for you to use like a traditional credit card. Keep in mind that there may be fees, interest, and annual fees to consider in addition to the security deposit when applying for and using a secured credit card. There may be secure credit cards on the market that offer favorable interest rates and that waive annual fees, so be sure to research some secure credit cards before applying.

Open loans and credit cards with low credit score requirements

It usually takes a VantageScore of 670 or above to get a traditional loan or credit card. But not always. There are some loans and credit cards that are specifically designed for borrowers with low credit or no credit history:

Student Loans

Lenders understand that students will often have low or no credit. If you can demonstrate enrollment at a college or university, you should be able to qualify for a student loan. Keeping up the payments on these loans will help you build a credit score.

Student credit cards

Student credit cards have a more flexible acceptance rate of lower credit scores than traditional credit cards. However, these cards may charge higher interest rates and offer a lower credit limit. The best way to use a student credit card is to pay off your balance in full each month. Then you won't be charged any interest and can work towards establishing a good credit score in order to qualify for a larger credit limit.

Retail Store credit cards

Retail stores sometimes offer credit cards to people with low credit scores, but they also typically charge high interest rates on monthly balances. Making on time payments to these cards can help improve your credit score—just be sure to pay off your balances quickly, to avoid the interest charge.