Building Credit From the Ground Up

Navigating the landscape of credit can be treacherous, especially when you don't know where to begin. Thankfully, there are plenty of ways to start on the right path.

Start With Responsible Credit Products

The best way to start building credit is to, well, get credit! You don't have a credit score until you begin building credit history by making payments, and that score will start low depending on how you manage those payments. The lowest your score can start is 300 points, though a good credit score is typically between 670-739 points, which is what you want to aim for. This can be done several different ways, though it's important to be cautious when deciding which is right for you and ensure you will be able to make payments on time.

Secured Credit Card

Unlike a traditional credit card, secured cards require an upfront security deposit in order to open the account, usually equal to the credit limit you're after. For example, let's say you want a card with a credit limit of $300. You'd make a one-time security deposit of $300, and the card is yours for however long you decide to keep it.  

Most financial institutions and companies require a fairly decent credit score and credit history to open a regular credit card due to the risk of lending to someone who doesn't have a good payment history. A secured card is their solution: a risk-free way for both parties to benefit while the card owner can build their credit.

Credit Card (with authorized user)

If you need a large amount of credit and don't have enough for a security deposit, then a regular credit card may be a better pick for you, though you will most likely need someone who has good credit to be an authorized user on the account. This means whoever is designated as 'authorized user' will also have full access to the card, though they cannot make changes to the account the card is under. The authorized user isn't required to make any payments for the card; that responsibility falls solely on the primary cardholder.

If you go this route, ensure the person you are authorizing is responsible. You will be responsible for making payments on time, regardless of how much your authorized user uses the credit card. But this is a great option for building credit without putting down money upfront, just be sure to make payments on time!

Auto Loan (with co-signer)

Do you need a car or already have an auto loan? The good news is you can kill two birds with one stone! Any payment you make on a loan in your name will help you build credit. However, if you're thinking of starting an auto loan and don't have any credit history, then you will need a co-signer who does have good credit in order to get approved.

A co-signer has shared responsibility for the loan, so while they're just as responsible for making payments as you, their credit is just as affected as yours. Missed or late payments can negatively impact your credit and theirs, so it's important that both parties understand their responsibility and are willing to put in the safe effort. Generally, co-signing is very beneficial, as you may get lower rates, larger borrowing power, and an opportunity to raise your credit score. 

DIG DEEPER: How to Get a Car Loan With Bad Credit

Student loans

Just like a car loan, if you are already paying student loans or are planning to in the future, you can build your credit score and history at the same time.  Student loans are a type of installment loan and are reported to the credit bureaus, which means your credit score is positively affected when payments are made on time. Payment history is a big part of building credit, so be sure you make those payments on time or early if possible!

Practice Good Credit Habits

Now that you know the tools in your arsenal, using them correctly is a very different challenge! As previously mentioned, making payments on time is the most important rule to follow. In fact, the entire reason credit scores exist is to let lenders know how well you're able to pay back the money they loan out to you. Here are some other tips:

• Keep credit utilization low — The less you spend on a credit card, the better! Try to spend only about 30% of your credit limit at a time.
• Don't apply for too much credit at once — Refrain from opening multiple cards, lines of credit, or loans if possible. While you may think making more payments is good for your score, it actually can negatively impact your credit score and will make it much harder to make timely payments.
• Limit new credit applications — Applying for anything that requires a financial institution or company to check your credit score will actually lose you a few points each time, which adds up fast, especially if you're trying to build your score. Only apply for the things you need!
• Don't close old credit accounts — If you pay off your credit card and don't need it anymore, keep it open! Having an open credit card or line of credit with a zero balance will earn you points towards your credit score as it sits there unused. Ironically enough, not using a credit card is just as good a way to build credit as making payments on it!

DIG DEEPER: How to Improve Your Credit Score

Monitor and Report Your Progress

It's important to keep an eye on how your score is doing. Not only does checking up on it every now and then help you get a better idea of how well you're keeping up on payments, but you also may end up catching an error or fraud that could end up saving your score. Errors can be resolved or disputed by contacting one of the three credit bureaus, while fraud may require a visit to a financial institution to prevent any further issues. Be sure to visit annualcreditreport.com to get a free credit report. You have access to a free report every 12 months. 

DIG DEEPER: 5 Tips for Spotting Fraud in Your Credit

Why Building Credit Matters

Is building credit really that important? Yes! It's the foundation of many things we take for granted in our lives. Buying a house or a nice car, renting an apartment, getting a cell phone plan, or even qualifying for certain jobs — all of these are affected by your credit score. These things become more difficult, if not impossible, if you haven’t established credit. 

As you start establishing credit, you’ll begin moving the needle on your credit score, which can open access to bigger loans, better mortgage rates, and all kinds of opportunities — if that needle moves in the right direction. Delinquent payments and defaulting on loans can drag your score down to a level that can be difficult to recover from, so it's very important to stay on top of it! And there's nothing wrong with getting a little bit of help to get you started.