August 27, 2024

How to Build Credit for the First Time: 7 Strategies

Building credit from scratch is like starting a fire without matches — it takes a little creativity and the right tools to get it going. But with the right strategies, you can absolutely learn how to build credit for the first time to build a strong foundation for your financial future.

Here are the basics of what credit is and the most effective methods for building it.

What is credit?

Credit is borrowed money you use to purchase goods or services. When you use credit, you’re agreeing to pay back the borrowed amount, usually with interest, over a set period of time. That could be in the form of revolving credit, like a credit card, or an installment loan, like a mortgage.

Your credit score is a three-digit number that represents your creditworthiness, or how likely you are to pay back borrowed money on time. This score is based on a few factors, including:

Your credit history, which reflects factors like how much credit you’ve used
How long you’ve had credit accounts open
Whether you make payments on time
How often you apply for new credit
How many types of credit you have (like multiple credit cards or loans)

Lenders and landlords may look at your credit score before approving you for a loan or renting you an apartment to see if you’re a responsible borrower. A lower credit score could make it harder to get approved or result in higher interest rates since it indicates there’s a risk of lending to you.

Building credit is all about establishing a positive credit history by borrowing money and paying it back on time. By using credit responsibly and consistently, you can improve your credit score and demonstrate your creditworthiness to anyone looking to evaluate your financial reputation.

7 of the best ways to build credit

Building credit doesn’t happen overnight, but with the right strategies and habits, you can establish a strong foundation for your financial future. Here are seven effective ways to build and maintain your credit:

1. Always make payments on time

Payment history is the most important factor in your credit score. Consistently paying bills on time establishes a track record of reliability. Set up automatic payments or reminders and take advantage of billing autopay programs so you never miss a due date.

2. Sign up for a secured credit card

Secured credit cards are a great option if you have no credit. With a secured card, you put down a cash deposit that becomes your credit limit. This deposit reduces the lender's risk, making it easier to get approved. Use your secured card regularly and pay your bill on time to build a positive payment history.

3. Become an authorized user on someone else’s account

If you have a family member or friend with good credit, ask them to add you as an authorized user on their credit card. As an authorized user, you’ll get your own card linked to their account. Their positive payment history can help you build credit.

But being added to an account in poor standing or spending irresponsibly can actually hurt the credit score of you and the card holder. Make sure you’re only sharing a credit card with someone you can trust, whether you’re the authorized user or the cardholder.

4. Take out a credit-builder loan

Credit cards aren’t the only way to build credit. You can take out a credit-builder loan with your bank, where they set aside a sum of money for you to make monthly payments toward. Once you’ve made all of the payments — which get reported to credit bureaus — you can access the full amount. It’s like taking out a loan you can’t access until you’ve already paid it back.

This might not be the most convenient option if you need credit to borrow, but it helps you build your credit if you’re starting from scratch. And you may even earn some of the interest you pay over the loan’s lifetime.

5. Maintain low credit utilization

Credit utilization is the amount of credit you’re using compared to your credit limit. A high utilization rate can lower your credit score, so pay down balances quickly and avoid maxing out your cards. A good rule of thumb is to keep your utilization up to 30%.

If you can responsibly manage your credit card, try to increase your credit limit to lower your utilization rate. Consistently spending $1000 a month on a card with a $1500 limit has a 66% rate. But if you can get an increase to a $2000 limit, that rate drops to 50%. Note that increasing your credit limit usually depends on your credit score, so you might need to improve it before you can take this step.

6. Monitor your credit regularly

Keep an eye on your credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. You’re entitled to a free report from each bureau once a year. Check for errors or signs of fraud, and dispute any inaccuracies you find. Catching issues early can help protect your credit.

Some platforms let you check your credit score at any time, like EarnIn’s Credit Monitoring tool. Although your score only updates once a month, it’s good to track whether it’s increasing or decreasing so you know how you’re progressing month to month.

7. Be patient and consistent

Building credit takes time. It’s a marathon, not a sprint. Stay focused on your goals, and don’t get discouraged if you don’t see results right away. With responsible use and consistency, your efforts will pay off in the form of a strong, healthy credit profile.

How long does it take to build credit?

Building a good credit score takes time and consistency, but exactly how long depends on a few different factors:

Your starting point. If you’re starting out with no credit history, it will take at least six months of activity before you have enough information in your credit file to generate an official credit score. This means using credit regularly and making on-time payments for at least six months.
Your credit habits. Consistently practicing good credit habits can help you build credit faster. Late payments or maxed-out credit cards can significantly delay your progress and keep you from reaching your credit goals for years.
The type of credit you use. Revolving credit accounts like credit cards can have a bigger impact on your credit score in a shorter time because they report to the credit bureaus monthly. This makes them a good option to consider if you need to learn how to build credit fast. Installment loans, like auto loans or mortgages, may take longer since they’re often reported less frequently and have a fixed end date.

Remember, building credit is a journey. Stay focused on your long-term goals and practice good credit habits consistently to gradually build strong credit.

FAQs

How do you build credit with limited funds?

Building credit doesn’t require a lot of money, but it does require using credit responsibly. Two methods discussed above that are particularly useful for those working with limited funds are becoming an authorized user on someone else’s credit card account and opening a secured credit card.

Becoming an authorized user allows you to piggyback on the main cardholder’s credit history without the responsibility of making payments. And using a cash deposit to open a secured credit card gives you access to credit while minimizing risk for the lender, making it easier to get approved even with limited funds.

What credit score do you start with?

When you first start building credit, you don’t have a credit score at all. Credit scores are based on your credit history, so until you have at least one credit account that’s been open for six months or more, there’s not enough information to calculate a score.

What’s the highest credit score you can have?

The highest credit score possible depends on the scoring model. For FICO and VantageScore, the most commonly used models, scores range from 300 to 850. A score of 800 or above is considered exceptional.

Take control of your credit with EarnIn

As you build your credit, stay informed and in control with EarnIn’s free Credit Monitoring tool. Get instant access to your credit score, view your credit usage and payment history, and receive real-time alerts to detect fraud and avoid surprises.

Checking your score with EarnIn will never impact your credit, so you can track your progress worry-free. Combine Credit Monitoring with smart credit-building strategies to achieve your financial goals faster.

Start tracking your credit today.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. EarnIn is a financial technology company, not a bank. EarnIn services may not be available in all states. Restrictions may apply. For more info visit earnIn.com/TOS. Calculated on the VantageScore 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don’t be surprised if your lender uses a score that’s different from your VantageScore 3.0. Learn more: https://www.experian.com/assets/consumer-information/product-sheets/vantagescore-3.pdf