By Paul Kim April 7, 2022
Your credit score helps creditors assess how likely you are to repay a debt. The higher your credit score, the less risk the creditor takes on when giving you a loan. Credit is affected by how reliably you make your payments, the percent of your available credit that you're currently using, and how extensive your credit history is.
Your credit score indicates to lenders how likely you are to repay a debt.
Building your credit from scratch is usually easier and quicker than repairing damaged credit.
Options for rebuilding your credit often come with higher interest rates.
Having good credit is essential to all the major financial decisions you make, such as buying a car, renting an apartment, or buying a house. A higher credit score will let you borrow greater amounts and give you access to credit cards that come with perks and rewards. On the other hand, a low credit score will limit how much you can borrow and the types of loans and credit cards you have access to. A low credit score can also mean an annual percentage rate (APR), which can result in you paying more for anything that you buy. "Ultimately having at least a decent credit score will save you money," says Shindy Chen, the founder and chief executive officer of Scribe. Credit builds off of itself. Your credit score rises as you prove you can repay a loan or pay off credit card debt. Yet you often need credit to take these loans out in the first place, which would ordinarily prevent people with no credit or low credit from building a credit history. Fortunately, there are products that are designed to help people build their credit.
How long does it take to build credit? Building credit from scratch generally takes less time than rebuilding from a place of bad credit. "It's definitely easier for a person with a clean slate to build a credit history and work up to a good credit score than somebody who has demonstrated a history of negligent credit management," Chen says. With no prior credit history, it usually takes about six months of activity for credit bureaus to gather enough data to calculate your credit score. On the other hand, if your credit score has been hurt by defaulting on a loan or even a late payment, that will continue to negatively affect your credit score for seven years before it is no longer taken into consideration. It can take seven or 10 years for a bankruptcy to drop off your credit report.
How to build credit Unfortunately, creditors are less trusting of people with low credit scores or no credit history at all, which means the products that they offer that don't have credit requirements come with stricter terms and harsher penalties.
1. Use a co-signer or become an authorized user One of the easiest ways to build credit without a prior credit history or bad credit is to become an authorized user on a friend or family member's credit card. As an authorized user, you get a credit card under your name and credit history, but it's attached to the primary cardholder's account. So when the primary cardholder makes their payments, it also goes toward building your credit history. Note: There is a downside to becoming a co-signer or authorized user on someone else's account: If the primary cardholder misses their payments, that will also negatively impact your credit score. This is a popular way parents can help their children build credit. While you have to be 18 to qualify for your own card, most credit card companies allow you to become an authorized user as a minor. Some credit card companies don't have a minimum age requirement at all. Once you turn 18, you may find that you don't have the required income to get approved for a credit card on your own. At this point, a relative can become a co-signer on the credit card if they have good enough credit. A co-signer takes on the responsibility of paying off your debt if you are not able to. Co-signing also applies to loans
. 2. Get a credit-builder product Credit-builder products are products designed specifically to let you build credit without any prior credit history. Secured credit cards: Secured credit cards are credit cards with a line of credit backed by a security deposit you make when you first open the card. The credit available to you will be equal to the amount you deposited, which can be anywhere between $50 to $5,000, though most card deposit ranges will stay within $200 to $2,500. You will get this security deposit back, so it may be worth it to make a larger deposit so you can do more without throwing off your debt-to-credit ratio. Many credit card companies that offer secured credit cards also offer a graduation program at a certain point — as early as six months into the account's life — if you use your card responsibly. At that point, you will get your deposit back and your card functions like a traditional credit card. Note: There is a downside to becoming a co-signer or authorized user on someone else's account: If the primary cardholder misses their payments, that will also negatively impact your credit score. Student credit cards: Student credit cards operate like traditional credit cards in that they're unsecured, so they aren't backed by a deposit. The credit requirements are low for a student card, so they come with higher interest rates and lower credit limits than traditional credit cards. In order to get a student credit card, most credit card companies require that you provide proof of enrollment, though there are a handful that just require you meet a certain level of income. If you don't have a reliable source of income, student credit cards also accept co-signers. Credit-builder loan: Typically, the money you borrow through a loan is given to you upfront and you pay it back in increments. But a credit builder loan works in reverse. Here, creditors withhold the amount of money you're "borrowing" — usually $1,000 or less — until you pay it off, at which point they give you the borrowed money. At a glance, this operates like a savings account. However, this loan is still subject to interest, so you will likely be paying the lender more than you get back. Nevertheless, this can be another possible option to lengthen your credit history.
3. Get credit for any bills you pay Normally, your monthly payments toward rent or utilities aren't reported to credit bureaus, so they don't go towards building credit. The only time these monthly expenditures are reported is if you regularly miss your payments, which will lower your credit score. However, you can add these payments to your credit report through a self-report. Though you cannot report your own payments directly to credit bureaus — you need to be a data furnisher to report payments to credit bureaus — you can go through third-party services that report your payments for you. Experian, one of the three credit bureaus, offers a service called Experian Boost, which allows you to add your utilities, phone bill, cable, and charges for monthly streaming services to your Experian credit history. These will affect your FICO® Score 8, which is the most widely used scoring model, particularly among credit card companies. There are also third-party services that will report your rent payments to credit bureaus. However, these require landlords to cooperate with these services. On one hand, a tenant who is trying to build credit through rent is more likely to make payments on time. However, Chen says that "it's unlikely that they would bother doing that because it's just an extra administrative step for them." More recently, the buy now, pay later (BNPL) model can also add to your credit history, depending on the type of service that you use. Yet another avenue for building credit, Chen warns that the risks are the same with all types of borrowing. If you lose track of your payments, it could end up hurting your credit. "For people who are trying to manage their budgets, every time you sign up for one of those services, you're adding to your monthly payments," she says.
4. Secured loan Similar to a secured credit card, secured loans are backed by collateral. The amount of credit you can access is dependent on the value of whatever you put up for collateral, such as a car or your house. If you default on your loan, the creditor possesses whatever you put up as collateral. Because your loan is secured, it's less risky for the creditor. This means that these loans can accept people with lower credit scores while also offering a lower annual percentage rate.