How to Build a Credit History
Credit newbies can take advantage of both tried-and-true methods and new alternatives.
Most lenders expect you to have a decent credit record to qualify for a loan or credit card. But if you’ve never had a credit card or taken out a loan, you don’t have much of a credit history.
It’s a conundrum that young people face as they begin their adult lives. And having no credit record (or a thin one) touches more than just your ability to borrow money. A landlord may check your credit report before offering you an apartment, and a wireless carrier may peek at your credit before offering you service or setting a price for a plan or device.
Fortunately, you can establish a credit history even without a track record. And if your credit report contains negative items, such as late payments or a bankruptcy, you can use some of the same strategies to rebuild credit.
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Apply for a credit card. Using a credit card responsibly helps you get a foot in the door to good credit. To build a positive history, pay your bills by the due date and try to keep the balance to less than 20% to 30% of the card’s limit. The percentage of available credit that you use on your cards is known as your credit utilization ratio, and the lower it is, the better for your credit score. As you learn the ropes, make just a few basic purchases monthly—say, to buy groceries—to help ensure that you can afford to pay the bill in full and avoid carrying a balance from month to month, which incurs interest.
Becoming an authorized user on a parent’s credit card is a common way young people start out with credit. That’s the route Nate Reistetter, 19, took after he heard some coworkers his age at a summer job talking about building credit. A sophomore at the University of Wisconsin—Madison, he charges some course materials to his mother’s Amazon Prime Rewards Visa Signature credit card (16.24% to 24.24% annual percentage rate). “It works well because my Amazon purchases are regular and small,” says Reistetter. As long as the cardholder pays the bills on time and keeps the utilization ratio low, an authorized user should see a positive effect on his or her credit score.
Reistetter has also thought about applying for a student credit card. Our favorite one, Discover It Chrome for Students (0% for six months, then 14.99% to 23.99%), offers 2% cash back on up to $1,000 spent per quarter at gas stations and restaurants and 1% on other purchases. Plus, you get a $20 statement credit each academic year that your grade point average is at least 3.0.
Card issuers are usually more lenient in evaluating student-card applicants’ income and credit history than in evaluating the finances of applicants for standard cards. Bank of America—which issues another student card that we like, Bank of America Cash Rewards for Students Mastercard (0% for 15 months, then 15.99% to 25.99%)—looks for an independent ability to pay the bills based on income, such as from a summer or part-time job, in applicants ages 18 to 20.
If you or your parents have been customers for a while, your bank or credit union may give you a chance. You’ll have the best shot with smaller, local banks. Or open a store credit card. Retail credit cards often have less-strict eligibility requirements than standard cards from large issuers, but many store cards come with high interest rates and low limits.
Get an un-credit card. Another option is to open a secured credit card. Qualifying for a secured card is relatively easy because you make a deposit, often equal to the card’s limit; if you fail to pay the bill, the issuer can dip into the deposit. Some secured cards even offer rewards. The Discover It Secured card (24.99%), for example, offers the same cash-back structure as Discover’s Chrome for Students card. After you’ve had the card for eight months, Discover will perform monthly reviews to determine whether you’re managing credit well enough to convert to an unsecured account and receive your deposit back.
Some financial-technology companies are conjuring up cards that rely on alternative methods to evaluate creditworthiness. The Petal Visa card (14.99% to 25.99%) focuses on people new to credit and charges no fees. Plus, you get 1% cash back right away, 1.25% after six on-time payments and 1.5% after 12 on-time payments. If your credit history isn’t robust, you can link your bank account for Petal to review your cash flow. Depending on how healthy your credit and finances are, the credit limit runs up to $10,000—much higher than you can typically get with a secured card.
Consider a loan. Some community banks and credit unions offer credit-builder loans, which may be preferable if you’d rather avoid a credit card, says Beverly Harzog, credit expert for U.S. News & World Report. The lender puts the amount you borrow (typically $1,000 or less) into a deposit account, and you make payments of principal and interest on a predetermined schedule. After you pay off the loan, you get the money back, possibly with interest. Check that the lender reports your loan payments to the three major credit bureaus: Equifax, Experian and TransUnion.
If you have a student loan, making on-time payments can help beef up your credit history, too. Your mix of credit makes up 10% of your FICO credit score, so having both a loan and a credit card on your report may give your score a bit of a bump.
Leverage new alternatives. Experian Boost is a service that potentially increases your credit score by considering on-time payments of bills you owe to utility providers and phone or cable companies, which typically don’t report customer payments to the credit bureaus. At www.experian.com/boost, link the bank account you use to pay bills. Experian will scan your account for positive payment information and include what it finds in your Experian credit file. Equifax plans to soon introduce a service through which lenders may consider payment information for utility, phone and cable bills, with the applicant’s permission. (See Kiplinger Q&A: Hill Harper)
FICO has been testing an UltraFICO score with a handful of lenders and expects the score to become more widely available this fall. UltraFICO incorporates activity from your bank account, including how consistently you have cash available and whether you’ve overdrawn your account. If you can’t qualify for credit with a traditional score, a lender may ask whether you’d like to link up to 20 active personal checking or savings accounts for evaluation with UltraFICO.
Reap Some Rewards
The Apple Card (12.99% to 23.99%) is an attractive choice for newbies. Normally, you’d have trouble getting a rewards card with a score below about 670, says Ted Rossman of CreditCards.com. But, he says, “I’m hearing that a lot of people with credit scores in the 550 to 650 range are getting approved.” The card offers cash-back rewards of 3% on Apple purchases, 2% on other purchases you make with Apple Pay, and 1% at stores or websites that don’t accept Apple Pay.
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Lisa has been the editor of Kiplinger Personal Finance since June 2023. Previously, she spent more than a decade reporting and writing for the magazine on a variety of topics, including credit, banking and retirement. She has shared her expertise as a guest on the Today Show, CNN, Fox, NPR, Cheddar and many other media outlets around the nation. Lisa graduated from Ball State University and received the school’s “Graduate of the Last Decade” award in 2014. A military spouse, she has moved around the U.S. and currently lives in the Philadelphia area with her husband and two sons.