Wondering how to build credit from scratch? Worried you haven't started building credit yet? Here is what you need to know to build good credit for the first time.
How do you get a mortgage, car loan, or apartment lease? By presenting the bank or landlord with a good credit history that demonstrates you’ve been financially responsible in the past.
But, how are you supposed to get approved for a loan or credit card if you’ve never had one before?
It’s the ultimate catch-22: No credit card? No credit history. No credit history? No credit card.
If you’re panicking because you don’t know how you’ll get that student or auto loan you need because you don’t have prior credit history, relax: It can be done.
Everybody starts life without credit. We’ll walk you through how to good build good credit fast—even if you’re starting from scratch.
Get help from a family member who has good credit
A willing parent or significant other who uses credit responsibly can help kick-start your credit score by either cosigning a loan or adding you as an authorized user on a credit card account.
Take out a loan with a co-signer
The easiest way to build credit for the first time is to open a loan account with a co-signer who already has good credit. A co-signer is simply someone who agrees to be responsible for the loan if you stop paying your bills for any reason.
In most cases, a bank will approve a loan for somebody with no credit history if there is a creditworthy co-signer on the application. In order for this to work, you need somebody who:
- Trusts you enough to put their credit rating on the line for your loan
- Has good credit themselves
If someone co-signs a loan for you and you don’t make timely payments, your co-signer’s credit will suffer along with your own. If you default on the loan—meaning you stop paying altogether— your co-signer is legally responsible to repay the debt. This situation has ruined plenty of relationships. Proceed carefully.
Another downside to this method is that it requires taking out a loan. That’s fine if you need a loan anyway—for example, you’re buying a car. But you don’t have to pay interest to build credit.
Become an authorized user on someone else’s account
You won’t apply for the card together, but you can ask somebody to add you to their credit card account as an authorized user. Ensure that you’re being added to the account as a fully authorized user, as some companies will issue extra cards in different names but only tie the account to one owner.
One way to check this: Do they ask for your social security number when adding an authorized user? If not, this trick won’t help you build credit.
After you become an authorized user on a parent’s or somebody else’s credit card, you don’t even have to use the card—as long as they keep paying their bills on time, you will start to build credit. (But it goes both ways, if they stop paying, this could actually hurt your credit! Proceed with caution.)
Get a starter credit card
A starter credit card is designed for people new to credit. Unlike many mainstream credit cards, starter credit cards often have:
- Lower credit limits ($300-$500 is a common start)
- An annual fee
- Higher interest rates
- Limited or no rewards
Some starter credit cards are also secured credit cards. What this means is that you need to have money in a bank account equivalent to your credit line. So if you want to spend $1,000 on your credit card, you need $1,000 in the bank to cover that. And you make monthly payments like usual—it’s not a debit card, where every purchase you make is deducted from your balance.
Although similar to a debit card, secured credit cards work slightly differently and, unlike debit cards, report your payments to the credit bureaus so you can build credit.
If you’re a full-time college student, try starting with a student credit card. These cards are designed to approve students and you can upgrade them when you graduate. Many don’t have the lowest APRs or best rewards out there, but you’ll have a good shot of getting approved and can start building better credit.
If you have some credit history, but not a lot, certain Capital One credit cards can be among the easiest cards to get approved for.
Just because two cards may be better than one, I would stop there for now. As the result of a new inquiry on your credit report, your score might go down after you apply. But in the long run it should go up.