How to Start Building Credit for the First Time

Building credit is a key step in establishing financial independence and accessing various opportunities. Credit involves borrowing money with a promise to repay it with interest. A strong credit history is important for securing loans for major purchases like homes or cars, and renting an apartment. Building a positive credit profile requires time and consistent, responsible financial behavior.

Preparing for Your First Credit Application

Before applying for any credit product, gathering necessary personal and financial information is a first step. Applicants need to provide their full legal name, date of birth, current address, Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), employment status, and annual income. Financial institutions request this information to verify identity, assess repayment ability, and comply with regulatory requirements. Having a stable income and maintaining a bank account are important for managing credit.

Several entry-level credit products are designed for individuals with limited or no credit history. Secured credit cards require a cash deposit, which serves as the credit limit. This deposit acts as collateral, reducing risk for the issuer and making these cards accessible to new credit users.

Credit builder loans involve the lender holding loan funds in an account while the borrower makes regular payments over a set period. Once the loan is fully repaid, the funds are released to the borrower, and the payment history is reported to credit bureaus.

Becoming an authorized user on someone else’s existing credit card account is another option. As an authorized user, you can use the card, but the primary cardholder remains responsible for all payments. The account’s payment history can help build credit if the primary cardholder manages the account responsibly.

Co-signed loans involve a second person with established credit agreeing to be equally responsible for the debt if the primary borrower defaults. This arrangement helps individuals with no credit history qualify for a loan and build their own credit with on-time payments.

Applying for Entry-Level Credit Products

Applying for credit involves researching providers, reviewing the terms and conditions, and submitting an application. For a secured credit card, select an issuer that reports account activity to major credit bureaus. The application can be completed online or in person, followed by submitting the required security deposit. After approval, the card is mailed to the applicant within a few business days or weeks.

For credit builder loans, find a financial institution that offers these specific products. Many credit unions and some online lenders provide them. The application process involves reviewing loan terms, including any fees, interest rates, and the repayment schedule.

Becoming an authorized user is initiated by the primary cardholder, who contacts their credit card issuer to add another individual. The primary cardholder needs to provide the authorized user’s full name, date of birth, and Social Security Number.

For co-signed loans, both the primary borrower and the co-signer complete the application together. The lender evaluates the credit profiles of both individuals to determine eligibility and loan terms.

Maintaining and Growing Your Credit Profile

Once credit products are obtained, consistent and responsible management is key for building a strong credit profile. Making on-time payments is the most important factor influencing credit scores, accounting for a significant portion of the score calculation. Even a single late payment can negatively impact credit scores, remaining on reports for up to seven years. Establishing automatic payments for at least the minimum due helps ensure timely remittances.

Keeping credit utilization low is a key aspect of credit management. Credit utilization refers to the amount of credit used compared to the total available credit on revolving accounts, such as credit cards. Lenders generally prefer a credit utilization ratio of 30% or less, with lower percentages often correlating with higher credit scores. To maintain low utilization, pay off balances in full each month or make multiple payments throughout the billing cycle. Requesting a credit limit increase on existing accounts, without increasing spending, also lowers the utilization ratio.

Regularly monitoring credit reports is important for identifying inaccuracies or errors. Individuals are entitled to a free credit report weekly from each of the three major nationwide credit reporting agencies—Equifax, Experian, and TransUnion—through AnnualCreditReport.com. Reviewing these reports helps ensure that reported information is correct and can help detect fraudulent activity.

The length of credit history also contributes to credit scores, as it demonstrates a proven track record of managing credit over time. Generally, the longer accounts have been open and active with positive payment history, the better. Consequently, it is often advisable to keep older accounts open, even if they are not actively used, to preserve the length of credit history. Over time, as a credit profile strengthens, diversifying credit by incorporating different types of accounts, such as both revolving credit (like credit cards) and installment loans (like auto loans), can also be beneficial. This step is typically pursued after a solid foundation of responsible credit use has been established.