Learning how to start building credit isn’t easy, especially when you’re starting from scratch. Fortunately, there are tried-and-true steps you can take to increase your credit score.
Although you won’t get a perfect score overnight, these moves will help you build good credit, slowly but surely. Read on to learn how to establish credit while also building solid financial habits that will keep you from falling into debt.
- 10 strategies to start building credit
- Plus: Best practices for checking your credit
- Plus: Building credit takes time
If you’re wondering how to establish credit from scratch, these steps will help:
1. Learn the fundamentals of credit
2. Become an authorized user on your parent’s credit card
3. Sign up for a secured credit card
4. Pay your balance in full every month
5. Upgrade to a traditional credit card
6. Keep your credit utilization low
7. Don’t open too many accounts at once
8. Pay all of your bills on time
9. Avoid student loan default
10. Keep your accounts open, unless they’re costing you
When you’re thinking about how to start building credit for the first time, there are a few things you should know. Let’s first focus on some terminology. Those are some of the main terms you need to know when it comes to building credit:
- Credit: Money that has been lent to you by a financial institution. This might be a loan from a bank or a line of credit from a credit card company.
- Creditor: A financial institution, retailer or other company lending you money via a loan or line of credit.
- Credit report: A report that reflects the credit accounts you have, your payment history, your balances and other key information that reflects your borrowing behavior.
- Credit Reporting Agency (CRA): Companies responsible for compiling and maintaining your credit report. The three most common CRAs are Experian, TransUnion and Equifax.
- Credit score: A score of your behavior as a borrower, not to be confused with your credit report. Your score is not on your credit report, but there are ways to check it for free.
- FICO and VantageScore: Two top credit score developers in the U.S.
- The Fair Credit Reporting Act: This act protects the accuracy of the information on your credit report. It legally binds CRAs to only report accurate information on your credit file, among other things.
While we’re at it, here are the major factors that play into your credit score, as described by Experian:
- Payment history
- Credit utilization
- Length of credit history
- New credit
- Type of credit
- Public records (e.g., bankruptcy)
- Number of inquiries on your credit report
Once you understand how credit works, you can use this knowledge to build your credit. One easy tip on how to establish credit is to ask your parents to add you as an authorized user on their credit card.
If your parents are responsible with their credit cards, pay their bills on time and don’t max them out, then this is an easy way for you to start building credit fast.
The best part is you don’t need to use the card. Instead, you can enjoy a budding credit score just by having your name on the account.
When you’re ready to try credit on your own for the first time, a secured credit card is a great way to do it. Secured credit cards are just like normal credit cards, but they require you to put down a deposit to get approved.
Below are a few benefits of this type of credit card:
- It’s easy to get approved.
- It comes with a relatively low credit limit.
- The card won’t let you charge more than you paid as a security deposit.
It’s easy for someone to slowly build up charges on a credit card until they become almost impossible to pay back. Many begin a quick descent into credit card debt that way.
That’s why it’s so important to play it safe while you’re still figuring out how to build good credit habits.
Since secured credit cards don’t come with high credit limits, they allow you to try your hand at using credit cards without risking the possibility of falling deep into debt. You can use a secured card as your training wheels before you move on to traditional credit cards.
The best habit you can build is to pay your card in full every month. If you nail this habit while you’re learning to establish first-time credit, you’ll be light-years ahead of many long-time credit users.
Remember, it only takes a few casual swipes on your credit card to raise your balance to more than you can afford. While small charges don’t feel like they’ll add up to much, they do — and fast.
What’s more, if you carry a balance over from month to month, then the interest charges can multiply your balances more than you could have imagined. So do yourself a favor and pay off your secured credit card every month.
Need help reading and understanding your credit statement? This template from the Consumer Financial Protection Bureau (CFPB) helps you see what to look for on your monthly credit card bill.
There’s another benefit to secured credit cards. After roughly six months to one year of responsible secured credit card usage, you can likely upgrade to a traditional credit card.
Not only that, many credit card issuers will review your account automatically to see if you’re able to upgrade sooner. Once you either close your secured credit card or upgrade to a traditional credit card, you’ll get your security deposit back as long as your balance was paid in full.
When you transition to a traditional credit card, you’re going to go from a small credit limit to a potentially much higher one. However, the best thing you could do at this point is to pretend you didn’t get a higher limit.
This is not a time to let the high limit tempt you into spending more than you can afford. Now, more than ever, it’s important to maintain those good credit habits you worked so hard to develop.
Maxing out your available credit won’t do your credit score any favors. As mentioned, you don’t want to charge more on your credit cards than you can afford to pay back each month. But keeping your charges low isn’t just about staying out of debt.
Your credit utilization also impacts your credit score. A good rule of thumb is to keep your credit utilization under 30%.
So if you have $1,000 in available credit, you shouldn’t owe more than $300 at any one time. If you have $10,000 in available credit, keep your charges under $3,000.
By keeping your credit utilization under 30%, you can avoid dragging down your credit score.
Although you need lines of credit to build your credit score, opening too many accounts at once can hurt your score. I know, it’s a bit of a Catch 22.
To avoid hurting your score, don’t incur lots of hard credit inquiries in a short period of time. Even if lenders or credit cards are sending you preapproval letters in the mail or cashiers are offering you store credit cards, you don’t have to open an account.
Open your accounts strategically, rather than signing up for every offer that comes your way. Note that when you’re shopping for a car loan or a mortgage, you usually do have a window of time where you can check your rates with multiple lenders without harming your credit score.
And some lenders will let you check your rates without pulling a hard inquiry on your credit, such as when you’re comparing offers to refinance student loans.
Two factors that are the most influential when it comes to your credit score: paying on time and maintaining zero to low balances on revolving debt.
The first factor, payment history, is an easy win when it comes to learning how to build credit for the first time. After all, if you pay your bills on time every month, then you’re doing one of the best things you can to build good credit.
But that doesn’t just mean your credit card bills. That means your rent, your phone bill, your utilities, doctor’s bills and just about any other bill you can think of. While not all of these things relate to credit, unpaid bills can be reported on your credit history by all kinds of companies.
Even worse, if your accounts go into full default and are sold to a collections agency, then your credit will suffer. Collections accounts stay on your credit for seven years. Don’t let this happen to you.
Pay all of your bills on time. And if you think you really won’t be able to make one, contact your creditor immediately and see if you can work out a payment plan.
Of all the bills in the world that can become overwhelming, student loans can certainly top the list. But you want to avoid student loan default.
Unlike other types of debt, student loans are nearly impossible to discharge through bankruptcy. What’s more, student loans getting sent to collections will damage your credit. Plus, it makes it hard for you to know who’s servicing them when you are ready to start repaying.
If you have federal student loans and you’re struggling to pay them back, you have access to the following options:
And if you have private student loans and the payments are too high, see if you can refinance to get a lower interest rate. You’re not likely to get approved for this on your own if you’re still new to credit, but there is often the option to add a cosigner.
But if you refinance your student loans with the help of a cosigner, it’s more imperative than ever to pay your bill in full and on time every month. That’s because a delinquency on your part won’t just hurt your credit — it’ll hurt your cosigner’s credit too.
The length of your credit history also factors into your credit score, which is why it can be so challenging when you’re learning how to start building credit for the first time. Once you have some accounts open, avoid closing them unless you have a good reason to do so.
It’s fine to close an account if it’s charging you a big annual fee or if it’s a loan you want to pay off as fast as possible. But if the account isn’t costing you, closing it could shorten your credit history and ding your score.
Now that you know how to establish credit, here’s how you can monitor your credit score to ensure your efforts are working. Here are three ways to do it:
Everyone is entitled to their credit report once a year from all three credit reporting agencies. You can get yours at AnnualCreditReport.com.
Because you have access to your credit report from each of the three CRAs, you could check several times per year by spacing them out. For example, you could check your Experian credit report early in the year, TransUnion a few months later and Equifax a few months after that.
That way you’re getting your eye on your credit regularly without having to pay anything extra to do it. Just keep in mind that these credit reports can vary slightly as different creditors might not always report to all three CRAs.
Even though your credit reports from each of the CRAs can vary, that doesn’t mean you should ignore large inconsistencies. If you find that one or more of your credit reports is showing an error or a fraudulent account, immediately dispute it with the CRA showing the incorrect data.
Never ignore an error on your credit report. It could signify fraudulent activity or it could mean that someone else’s data is being included on your report. Either of these situations can greatly damage your credit, so take care of it early.
As you’re thinking about how to build your credit for the first time, your credit score might be the last thing on your mind. But after a few months of credit-building, it’s a good idea to start looking at your score to see where you stand.
There are many ways to get your credit score for free these days. But there’s one very important thing to keep in mind: the score you see isn’t necessarily the same one your lender sees.
Many companies who can show you your credit score only show you an educational credit score. That’s a score meant to give you an idea of what your score is.
However, lenders tend to use different types of credit scores, sometimes even proprietary ones or industry-specific scores. Since that changes how the calculations work, your score will be different.
As for where you can check your credit score for free, many banks and credit card issuers now let you see that information when you log into your account online, But if yours doesn’t, check out this list of places where you can get your free credit score.
One of the most important pieces of advice someone can give to someone who’s learning how to establish credit is to not obsess over their credit score.
The worst thing you can do is focus so much on your credit score that you end up making decisions that are bad for your finances.
In fact, an important principle of building credit is to focus on things that are good for your credit and your money, such as:
- Using revolving credit but never letting it turn into debt.
- Paying on time.
- Not taking on any new loans unless you need them.
If the decisions you’re making are good for your finances, there’s a good chance they’ll be good for your credit.
Don’t forget: it takes time to learn how to start building credit and maintain the good habits you’ve learned. Stay focused, stay responsible and let time do its thing. Soon enough, you’ll have a good credit score and the tools to help you keep it that way.
Rebecca Safier contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.15%1||Undergrad & Graduate|
|1.99% – 5.64%2||Undergrad & Graduate|
|3.80% – 9.36%3||Undergrad & Graduate|
|1.91% – 5.25%4||Undergrad & Graduate|
|2.25% – 6.53%5||Undergrad & Graduate|
|2.15% – 4.42%6||Undergrad & Graduate|
|1.89% – 5.90%7||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|2.00% – 5.63%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2021.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.15%-4.42% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
7 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
8 Important Disclosures for Nelnet.
Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.
Request for the cosigner to be released can be made by the borrower after 24 consecutive, on-time payments (not later than 15 days after the due date) of principal and interest have been made. Borrowers in deferment or forbearance must make 24 consecutive, on-time payments after re-entering repayment to qualify for the release. The borrower must be current on their payments at the time of the cosigner release request and show the ability to assume full responsibility of the loan(s) by meeting certain credit criteria on their own at the time of the request, including, but not limited to, being a U.S. citizen or having permanent residency in the United States, being the age of majority in their permanent state of residency, providing sufficient proof of income, and having no student loans in default.
Hardship forbearance allows you to temporarily suspend payments on your loan(s) while you are experiencing financial hardship. It is offered in increments of two or three months, with a maximum of 12 months available, in aggregate, over the life of the loan. If your loan(s) are in good standing at the time of your request, you will be eligible for forbearance in increments of two monthly payments. If, at the time of your initial request, your loan(s) are considered past-due, you will be eligible for forbearance in increments of three monthly payments. Future increments of forbearance, up to a life-time maximum of 12 months, may be requested upon the completion of making a certain number of principal and interest payments. During the two- or three-month forbearance period, you will not be required to make payments; however, any unpaid interest will continue to accrue and will be capitalized (added) onto your principal balance at the end of the forbearance period. You may continue making payments in any amount without penalty during the forbearance period. Your loan repayment term will be extended by the number of months in the forbearance period.
Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your permanent state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.
Refinance Loan Limits:
Loan Refinancing Risks: Federal student loans include benefits that may not be offered with private student loans. Carefully review any potential benefits that may be lost by refinancing federal and private education loans, such as the loss of any remaining grace periods. To learn more about what to take into consideration when refinancing federal student loans with private education loans, click here
Selecting ‘Get Started’ results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Fixed interest rates range from 2.99% APR (with auto debit discount) to 6.25% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.
Variable interest rates range from 2.00% APR (with auto debit discount) to 5.63% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.15% as of 5/4/2021.
The lowest interest rate for each loan type requires automatically withdrawn (“auto debit”) payments, a five-year repayment term, and the borrower making immediate principal and interest payments. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.
*Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score. **Your actual savings may vary based on interest rates, outstanding balances, remaining repayment terms, and other factors.