How to Start Building Credit for the First Time

Credit is a record of an individual’s ability to manage borrowed money and repay it consistently. It serves as a financial reputation, influencing access to various financial products and services. Lenders, landlords, and even some employers review credit information to assess financial reliability. Establishing a positive credit history early on can open doors to favorable loan terms, housing opportunities, and other financial advantages. This article explores practical steps and financial products available for individuals to begin building credit.

Initial Credit Products

For individuals with no established credit history, certain financial products help create that initial record. Secured credit cards are a common starting point, requiring a cash deposit that acts as the card’s credit limit. For instance, a $300 deposit typically provides a $300 credit limit. Secured cards function much like traditional credit cards, with purchases and payments reported to the major credit bureaus.

Another effective tool is a credit-builder loan. With this type of loan, the borrowed amount, often ranging from $300 to $3,000, is held by the lender in a savings account or a certificate of deposit (CD). The borrower then makes regular monthly payments, usually over six to 24 months, with interest. As payments are made, the lender reports this activity to the credit bureaus. Once the loan is fully repaid, the held funds are released to the borrower.

Becoming an authorized user on another person’s credit card can also help build credit. An authorized user receives a card linked to the primary cardholder’s account and can make purchases. However, the primary cardholder remains solely responsible for all payments. If the primary cardholder maintains a positive payment history and low credit utilization, this activity may be reported to the authorized user’s credit report. This method relies on the primary cardholder’s responsible financial management, as their actions can impact the authorized user’s credit standing.

Some small personal loans from credit unions or specific retail store cards might also be options for those with limited credit. Some banks offer standard credit cards specifically for existing customers to help them establish a credit history. It is important to confirm that any financial product used for credit building reports account activity to all three major credit bureaus to maximize its impact.

Building a Positive Credit History

Once an initial credit product has been obtained, managing that account is important for building a strong credit history. Payment history is the most influential factor in credit scoring models, accounting for approximately 35% of a FICO Score. Consistently making all payments on time demonstrates financial reliability. Even a single late payment can negatively impact a credit score and remain on a credit report for up to seven years.

Credit utilization represents the amount of credit used compared to the total available credit. Keeping this ratio low, typically below 30% of the available credit limit, is advised for a positive credit score impact. For example, if a credit card has a $1,000 limit, maintaining a balance below $300 would be beneficial.

The length of credit history also contributes to a credit score, reflecting how long accounts have been open and actively managed. Generally, older accounts in good standing can positively influence a score, as they demonstrate a long track record of responsible credit behavior. For this reason, closing older credit accounts, even if paid off, might shorten the average age of accounts and potentially affect the credit score. It is often better to keep old accounts open and occasionally use them to maintain their active status.

A diverse credit mix can also be beneficial, indicating an ability to manage different types of credit. This includes a combination of revolving accounts, such as credit cards, and installment accounts, like personal loans. While a varied mix can be a positive indicator, it accounts for a smaller portion of a credit score, typically around 10% for FICO Scores. Therefore, opening new credit accounts solely for the purpose of diversifying a credit mix is generally not recommended if the new debt is unnecessary.

New credit applications can also have a temporary, minor impact on a credit score. When applying for new credit, a “hard inquiry” is typically placed on the credit report, which can slightly lower the score for up to 12 months. Multiple hard inquiries in a short period might signal increased risk to lenders. However, some scoring models treat multiple inquiries for the same type of loan within a short timeframe (e.g., 14 to 45 days for mortgages or auto loans) as a single inquiry, allowing for rate shopping without excessive score impact.

Understanding Your Credit Progress

Regularly monitoring credit reports and understanding credit scores are important steps in assessing credit-building efforts. Federal law grants consumers the right to obtain a free copy of their credit report from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion—once every 12 months. These reports can be accessed through AnnualCreditReport.com, the only authorized website for free reports. A credit report details personal information, a history of bill payments, current debt, and any bankruptcy records.

Credit scores, such as FICO and VantageScore, are numerical representations of creditworthiness, typically ranging from 300 to 850. A higher score indicates lower risk to lenders. These scores are dynamic and change over time based on reported credit activity, reflecting the effectiveness of credit-building strategies. While credit reports generally do not include credit scores, many credit card companies and financial institutions now provide free access to a credit score.

Reviewing credit reports for accuracy is a necessary practice to identify and dispute any errors. Inaccuracies, such as incorrect personal information or accounts that do not belong to the consumer, can negatively affect a credit score. Consumers have the right to dispute inaccurate or incomplete information with both the credit reporting company and the entity that provided the information. Credit bureaus are generally required to investigate disputes within 30 days. If a dispute is not resolved, a statement of the dispute can be added to the credit file.