It’s the credit conundrum: You need credit history to get credit. But you need credit first to build that credit history. Where do you start?
That’s the question that millions of young people, new immigrants and people recovering from bankruptcy face as they try to build (or rebuild) their credit history in the hopes of one day qualifying for a rewards credit card, auto loan or mortgage.
The options for building credit aren’t many, and require a healthy dose of patience. “There is no quick way to build a strong credit history with a high score,” says Rod Griffin, director of public education at Experian. “Getting a good credit score is slow and steady.”
Here are the 5 ways to get it done.
Become an authorized user
Use someone else’s credit to start building yours. Ask a parent or close family member to add you as authorized user (AU) on their credit card, ideally one with a high limit, low balance, and positive payment history. Once an AU, the payment history associated with the card will be added to your credit report. The upside is that you’re not legally responsible to make payments. While this method will populate your credit report, many lenders may not lend to you if you only have an AU account on your report. Consider another option in addition to being an AU.
Open a joint account
Ask a parent or spouse to take the extra step—and extra risk—of adding you as a joint account holder on a credit card. This is similar to an authorized user, but with greater responsibility and benefits. As a joint account holder, you share the legal responsibility of making payments on the card account and can’t be removed from the account very easily—a risk for the original account holder. But credit scores weight the payment history of a joint account more than an AU account, a big boon for you.
Get a secured credit card
One of the most popular ways to build credit is using a secured credit card, which requires an upfront security deposit as collateral against its line of credit. These cards have small-dollar credit limits, typically between $200 and $1,000. The key is to charge no more than 30% of the limit and pay off the entire balance on time each month. A study last year from the Federal Reserve Bank of Philadelphia found that those who kept a secured credit card open for two years saw their credit score increase by 24 points. That’s not a lot, but it’s a start.
Obtain a secured loan or line of credit
Banks and credit unions offer small-dollar secured loans and lines of credit to help build credit. Wells Fargo and SunTrust Bank provide low-interest-rate loans and lines of credit backed by certificates of deposit or a savings account you have with the bank. They are easier to qualify for and come in amounts that are larger than many secured credit cards. The installment payments also make it easier to budget. The other bonus: You continue to earn interest on your savings or CD, helping to offset the interest rate you pay.
Rent a house or apartment
You payment history as a tenant isn’t suitable as a sole method for building credit, but it can be a useful supplement to the record you’re building through a secured credit card, loan or authorized user account.
VantageScore—a credit score used by seven of the 10 largest banks—and the FICO 9 credit score both factor in rental payment history if it’s available on your credit report. If your landlord doesn’t already report that history, there are a few ways you can send your rental payment history to the bureaus yourself, albeit at a cost. RentReporters and Rental Kharma both collect and pay your landlord on your behalf and then report to TransUnion. But they charge a sign-up fee, plus a monthly fee for the service. RentTrack is a similar service that reports to all three credit bureaus, charging a percentage fee for each payment. Otherwise, you can ask your landlord to consider reporting services such as ClearNow and PayYourRent.
Finally, sit tight
It’ll take three to six months before you have enough payment history on your credit report to generate a credit score, says Experian’s Griffin. After about six months, check your score to see where you are. Expect a score that’s at best in the mid-600s, says Griffin, but that’s enough to qualify for a basic credit card. After a year, pull your credit report. It will list reasons why your credit score isn’t higher, which you can use as guide for your next moves to further improve your score.