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Credit is something you can use to achieve major goals, such as owning a home, buying a car or paying for the trip of a lifetime. If you don't have any borrowing history, you may not yet have a credit report or credit score.
But no credit history doesn't mean you have bad credit, and there's plenty you can do to get the ball rolling. Here's how to start establishing your credit history.
How Do You Get a Credit Score?
Unless you have previous experience with credit or debt, you won't have a credit score or credit report. None of us are born with credit, and you aren't assigned a credit score at birth or automatically given one when you reach a certain age.
Once you encounter credit for the first time, whether that's when a parent adds you as an authorized user on a credit card, you take out a student loan or something else, a credit file is created in your name at the three consumer credit bureaus (Experian, TransUnion and Equifax).
Within six months, you'll typically have enough history to get your first credit score. It won't be zero, and it probably won't be 300, which is the minimum score possible from FICO® and VantageScore®, the most common credit scoring models. (Credit scores typically range from 300 to 850.) Your score may, however, start on the low side, tracking upward as you add to your history and make responsible financial decisions.
Also keep in mind that once you start building credit, you'll probably have many credit scores. That's because not all scoring models weigh credit report information the same way. That said, your credit scores from FICO® or VantageScore will likely be similar, and it's really most important to know which credit range you fall into when it comes time to apply for new credit.
Understand How Your Credit Score Is Calculated
Your credit score may look like a simple three-digit number, but it's determined by math formulas that consider many different financial factors. Ultimately, a credit score is an attempt to summarize your history with borrowing and repaying debts. Here are the main components that go into calculating your credit score:
- Payment history: When you pay your bills on time, you help build a positive credit history that can lead to an increase in your score. If you make late payments or miss them altogether, it can drag your score down.
- Credit utilization ratio: This measures how much of your available credit you are using at any given time. In other words, how much debt you're carrying compared with how much credit you have. Find this by dividing a card's balance by its credit limit. A credit utilization ratio above 30% can more seriously harm your credit scores, so aim to keep your utilization as low as possible.
- Length of credit history: Lenders and credit scoring models look at how much experience you have with borrowing when they assess your creditworthiness. When you're new to credit, you'll lack a robust credit history—but it's something you'll build over time simply by maintaining your accounts and paying your bills on time.
- Credit mix: Your credit score benefits from having multiple types of credit, in part because this shows you have experience with various types of borrowing. For example, having both loans and credit cards can help more than having just credit cards. This factor plays a minor role in your score, however, and you shouldn't take out new forms of credit for that reason alone.
- New credit: When you apply for new credit accounts, a lender will pull your credit report and scores to decide whether to approve you. When this happens, it adds something called a hard inquiry to your credit report. Lenders and credit scorers can see these on your credit report, and they may negatively impact your scores slightly for up to a year.
It's also important to understand the types of financial accounts that impact your credit scores. Checking and savings accounts do not play a role. Instead, your credit file focuses on the accounts you've opened to borrow money. These come in two forms:
- Installment credit: This is a loan in which you borrow a set amount and repay in fixed monthly installments with interest. Once you've repaid the loan in full, you're done with it. Examples include personal loans, auto loans, mortgages and student loans.
- Revolving credit: This type of credit includes credit cards and lines of credit. Rather than providing a lump sum that you repay over time, revolving credit allows you to borrow repeatedly up to a given limit and repay it in variable amounts. You only pay interest on what you use.
How to Start Establishing Credit
To begin establishing credit for the first time, here are some steps you can take to get started.
Open a Secured Card
A secured credit card, when used responsibly, can help you build a positive repayment history in the eye of creditors. Unlike a traditional unsecured credit card, secured cards require a small security deposit to serve as collateral, making them generally easier to qualify for than traditional, unsecured credit cards.
After a period of responsible use with a secured credit card, you may be able to qualify for a regular unsecured credit card, which won't require a deposit and will likely have a larger credit limit. If you paid all your bills on time, you may get your deposit back when you close the secured account and pay off any balance you owe.
Become an Authorized User
Another strategy that can help establish credit is to become an authorized user on a friend's or family member's existing account. If a parent, for example, has a solid credit score, you could ask to be added as an authorized user on their credit card. This means you'll get a card of your own that's linked to their account, which you can then use to make purchases. If the account is in good standing and it is reported to the bureaus, it can help get your credit off the ground.
Just be sure to responsibly use your card. The primary cardholder will ultimately be liable for paying off any charges, and overspending could hurt their credit score and get the account removed from your credit report if it results in missed payments. So only go this route if you and the cardholder trust each other to make smart decisions.
Consider a Credit-Builder Loan
One other option for getting your credit history started is to apply for a credit-builder loan, which is offered by some banks and credit unions. It isn't actually a loan in the traditional sense, but a financial product created specifically to help people establish credit.
Here's how it works: You choose a loan amount, and the lender puts that money into a savings account. Unlike a typical loan, you don't get any money upfront.
You make payments toward the loan, and you'll get the money back once you're done. It's more like a savings plan since you pay in and get to keep the money in the end—but since on paper you're making payments toward a loan, the credit bureaus count this as a form of credit. If your credit history is lacking, using a credit-builder loan can help kick things off and leave you with a savings buffer. Make sure your lender reports your payment activity to all three credit bureaus.
Always Make Payments on Time
Given that your payment history is the biggest factor in your credit score, make it a priority to make all your payments on time. You don't need to pay your bill in full; making at least your minimum payment is enough. If you worry you may forget, consider setting up autopay or calendar reminders so you don't pay late or accidentally skip a payment.
Check Your Credit Score and Report
As you begin to build your credit history, be sure to periodically review your credit report so you know where you stand. Don't obsess over it, but do check on it occasionally to keep tabs on how your financial decisions are panning out, both positively and negatively. You can get a free credit report of your credit report from all three credit bureaus (Experian, TransUnion and Equifax) every week through AnnualCreditReport.com. You can get a free copy of your Experian credit report every day, along with your FICO® Score☉ .
Monitoring your credit can also help you detect if you've fallen victim to identity theft. You can monitor your credit for free through Experian.
Another Way to Improve Your Score
Paying your utility bills on time doesn't usually make a difference in your credit score, but with Experian Boost®ø, they can. This free tool allows you to link your utility and phone bills to your Experian account and get your phone or other utility repayment history factored into your credit score and report. If you're new to building credit and have been savvy with paying your utility bills on time, this can give a quick lift to your credit score.