How to build credit

Whether or not you have credit, it can affect so many aspects of your life, from your ability to open a credit card, rent an apartment, or get a mortgage for a property. That’s because your credit score and credit history is the single biggest indicator of your creditworthiness.

In short, creditworthiness tells lenders how likely you are to repay any borrowed money. In the absence of a credit score, or a poor credit score, for that matter, lenders may not be willing to lend to you since there’s no evidence to show your credit history. A low credit score tells lenders that you are at a higher lending risk.

Lack of credit history or poor credit can also prevent you from getting a job, as some employers may check your credit report as part of a background check. Ouch!

It’s normal not to have a credit history, especially if you’re a young adult, a new student, or have recently moved to the United States from another country.

It simply means you’re missing two things: a credit account that’s been available for at least six months and one or more credit profiles that’s been reporting to one of the major reporting bureaus.

If you find yourself with little credit and unable to do the things you want, like rent an apartment, buy a home, or make a large purchase, then it’s time to start building your credit.

Slightly different than rebuilding your credit, there are different many ways to build your score from scratch. Most of it pertains to being trustworthy with borrowed money, which will eventually allow you to get more credit, access to other borrowing tools (like lines of credit), and keep improving your score.

Here are a few methods to develop an exceptional credit score, eliminate bad credit, and get a better score on your credit report.

Open a credit card

The first step in building credit is to open a credit card in your name. If you don’t have a credit history, you may only qualify for a secured card. When you open a secured credit card, you put down a deposit, which becomes your credit limit.

This helps ensure that you will pay back your first bill, even in the absence of credit history. With little or no credit, you may also be able to open a credit card with a cosigner.

If you only qualify for a secured credit card or with one as a cosigner, don’t worry. It will help you build a credit history much in the same way as a regular credit card.

Keep in mind, there are credit card providers and financial institutions that do not require a credit history or good credit score to open an account with them. Be sure that you understand how these credit cards work before signing on the dotted line, as these borrowing products typically come with higher monthly interest rates.

If you end up receiving a credit card, consider using your utilization ratio appropriately, pay your bills in full each month, and avoid performing cash advances.

Become an authorized user

If you cannot get your credit card, you may want to consider becoming an authorized user on someone else’s credit card, such as a parent, grandparent, or legal guardian.

Once added, you can use the card (and help pay the bill) to help improve your credit.

Just be sure that the card’s primary user is a trusted person, such as a parent or grandparent, and will pay their bills on time, or this strategy could negatively impact your credit.

Take out a loan

Yes, really. Taking out a loan is another answer to how to build credit and is an excellent place to start for those with no credit.

(Please note, the types of loans we’re speaking about here do not include personal loans or payday loans. You should avoid these loans, if possible, and avoid payday loans no matter what your financial situation is.)

Taking out a loan to pay for a larger purchase, like student loans or an automobile loan, which come with lower interest, isn’t the worst idea when it comes to building credit–as long as the lender reports to one of the major credit bureaus, which include TransUnion, Equifax, and Experian.

These bureaus manage your credit score and can provide it at your request for a fee. However, there are various free credit score tools that provide you with the option of checking your credit.

A credit builder loan is another way to build credit. These loans are interesting because you don’t get access to the funds right away, as with a traditional. Rather, you make payments toward the loan and get access to the funds once you’ve paid the loan back.