Building credit can be tricky. If you don’t have a credit history, it’s hard to get a loan, a credit card or even an apartment.
But how are you supposed to show a history of responsible repayment if no one will give you credit in the first place?
To have a FICO score, for example, you need at least one account that’s been open six months or longer, and you need at least one creditor reporting your activity to the credit bureaus in the last six months. (A VantageScore, from FICO’s biggest competitor, can be generated more quickly.)
Several tools can help you establish a credit history: secured credit cards, a credit-builder loan, a co-signed credit card or loan, or authorized user status on another person’s credit card.
Whichever you choose, make sure you use it in a way that will eventually earn you a good credit score.
Five ways you can establish credit
1. Apply for a secured credit card
If you’re building your credit score from scratch, you’ll likely need to start with a secured credit card. A secured card is backed by a cash deposit you make upfront; the deposit amount is usually the same as your credit limit.
You’ll use the card like any other credit card: Buy things, make a payment on or before the due date, incur interest if you don’t pay your balance in full. Your cash deposit is used as collateral if you fail to make payments.
You’ll receive your deposit back when you close the account.
Secured credit cards aren’t meant to be used forever. The purpose of a secured card is to build your credit enough to qualify for an unsecured card — a card without a deposit and with better benefits. Choose a secured card with a low annual fee and make sure it reports to all three credit bureaus, Equifax, Experian and TransUnion.
NerdWallet regularly reviews and ranks secured credit card options.
2. Apply for a credit-builder loan
A credit-builder loan is exactly what it sounds like — its sole purpose is to help people build credit.
Typically, the money you borrow is held by the lender in an account and not released to you until the loan is repaid. It’s a forced savings program of sorts, and your payments are reported to credit bureaus. These loans are most often offered by credit unions or community banks; at least one lender offers them online.
3. Get a co-signer
It’s also possible to get a loan or an unsecured credit card using a co-signer. But be sure that you and the co-signer understand that the co-signer is on the hook for the full amount owed if you don’t pay. (See “What You Need to Know About Co-signing.”)
4. Become an authorized user on someone else’s credit card
A family member or significant other may be willing to add you as an authorized user on his or her card. As an authorized user, you’ll enjoy access to a credit card and you’ll build credit history, but you aren’t legally obligated to pay for your charges.
Ask the primary cardholder to find out whether the card issuer reports authorized user activity to the credit bureaus. That activity generally is reported, but you’ll want to make sure — otherwise your credit-building efforts may be wasted.
You should come to an agreement on how you’ll use the card before you’re added as an authorized user. If the primary cardholder expects you to pay your share, make sure you do so even though you aren’t legally obligated.
5. Get credit for the rent you pay
Rent-reporting services such as Rental Kharma and RentTrack take a bill you are already paying and put it on your credit report, helping to build a positive history of on-time payments. Not every credit score takes these payments into account, but some do, and that may be enough to get a loan or credit card that firmly establishes your credit history for all lenders.
Build your score with good habits
Building a good credit score takes time, probably at least six months of on-time payments.
Practice these good credit habits to build your score and show that you’re creditworthy:
- Make 100% of your payments on time, not only with credit accounts but also with other accounts, such as utility bills. Bills that go unpaid may be sold to a collection agency, which will seriously hurt your credit.
- Keep your credit utilization low — utilization is your balance when compared to your limit. We recommend paying in full each month, but if do you carry a balance don’t let it exceed 30% of your credit limit.
- Avoid opening too many new accounts at once; new accounts lower your average account age, which makes up part of your credit score.
- Keep accounts open for as long as possible. Unless one of your unused cards has an annual fee, you should keep them all open and active for the sake of your length of payment history and credit utilization.
- Check each of your credit reports annually for errors and discrepancies.
Learn how to check your credit scores and reports
A credit report is a record of how you’ve used credit in the past. Your credit scores estimate how you’ll handle credit in the future, using the information in your credit reports. You’ll want to monitor both to watch for errors and to see your credit-building efforts pay off.
Several personal finance websites, including NerdWallet, offer a free credit score. Look for a site that also offers free credit report information, as well as educational tools such as a credit score simulator.
Several credit card issuers print FICO scores on customers’ monthly statements and allow online access as well. Some go beyond that and offer free scores to anyone, cardholder or not: Discover offers a free FICO score at CreditScorecard.com, while Capital One offers a free VantageScore at its CreditWise website.
Updated Oct. 28, 2016.
Erin El Issa is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @Erin_Lindsay17. Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: email@example.com. Twitter: @BeverlyOShea.