Building credit can seem intimidating, but it’s easier than it sounds. Without a good credit score, you’ll struggle to get a mortgage, buy a car, or find an apartment to rent.
Credit building is one of the great catch-22s of adulthood. How do they expect you to build credit without first having credit?
To build credit, you need to show that you can repay debts in a reliable way. Think “a Lannister always pays his debts” - Lannister’s would have excellent credit, because they always pay their bills on time.
Many factors affect credit, but you can safely ignore a few of them as you get started. Here are the important ones to get started with your credit.
- Repayment history: make consistent payments on a single line of credit
- Amount of money owed: Focus on keeping the balances on your credit cards low.
You can ignore these components of credit when you first start:
- Credit mix. If you're just starting out, applying for multiple sources of credit will hurt your score more than it will help.
- New credit. Your new credit will always start high, as all of your credit is new.
- Average age of credit accounts: your current account age will be zero - start by establishing an account to start the clock on your account age.
3 Best methods to start your credit
- Credit piggybacking
- Secured credit cards
- Credit builder loans
Credit piggybacking - how to build credit FAST
If you want to build credit fast, the best way is to become an authorized user on an account with a strong history. When you become a user on an account with a perfect repayment history, all of that history is added to your credit report. If you’re added as a user on a 7 year old account, you get 7 years of credit history immediately. This is called credit piggybacking.
Some companies will perform piggybacking as a service for customers. You can pay to become an authorized user of a stranger's credit account. If that account remains in good standing, you can benefit from the account history. This is illegal, and not recommended. The stranger who controls the account can run up their credit account, which will end up hurting your score.
- Fast. Will show up on your credit report within a month
- 100+ point increases possible
- Free if you know someone who can add you
- Very difficult if you don’t know anyone who can add you as an authorized user
- Accounts must be over 2 years old for maximum benefit
Secured credit cards
A secured credit card is one of the best ways to start your credit. Secured cards require an initial deposit. The bank holds your deposit until your credit score is strong enough, then return the deposit to you and replace the secured card with a real credit card.
To get one of these cards, you’ll need either an SSN or an ITIN and some money to use as a deposit. Once you have your secured card, you’ll need to use it responsibly to establish your credit.
- Always keep your balance below 30%, so if your deposit was $1000, you’d always keep your balance below $300. To make large purchases, preload your card or pay it off multiple times per month.
- Always repay your card in full before your payment due date
- Never spend money you don’t have
- Anyone can qualify
- Free if you never carry a balance between pay periods
- Slower than other methods, requiring 6 months to start your credit
- Require a deposit, which may be difficult for some
Credit builder loan
Credit builder loans allow people with poor or no credit to establish a credit history. They don’t require any existing credit to apply, but you’ll need to prove your income to qualify.
Where to get a credit builder loan
Credit unions: Finding a credit builder loan can be challenging, but your local credit union is a great place to start. Credit unions generally have sign up requirements like living in a particular city or county, or following a particular faith, so find one that serves your area or situation. Despite the requirements, credit unions typically offer the lowest rates.
Community development financial institutions: If your local credit union wasn’t an option for a credit builder loan, try a CDFI. These lenders lend to lower-income communities and can have lower rates.
Online lenders: Many online lenders provide credit-builder loans, but they’ll have higher rates than credit unions or CDFIs, typically in the 15-20% APR range.
The downside of these loans are the interest rates. Without established credit, you will end up paying higher interest, making this a more expensive way to start your credit.
- Anyone with income and a social security number can apply
- Easy to manage since the payment date and amount are fixed
- Great if you need to borrow a fixed amount of money for a specific use
- Can be used to consolidate bad debts
- Can have high interest rates, and you have to pay interest
- Not great if you don’t need a loan for anything
The best approach depends on your situation
As a young adult
As a young adult, getting your first credit line will be the biggest challenge to starting your credit. Credit piggybacking and secured credit cards will be the most reliable sources of early credit.
If your parents have an account with perfect history, ask to be added as an authorized user on the account. Piggybacking will jumpstart your credit into the “good” to “excellent” range within months.
If piggybacking isn’t an option, a secured credit card is a great way to go. Save up a deposit of at least $1000, then pay your balance in full each month and keep your utilization below 20%. Within 6 months, your credit score will be in the low 700s.
As an adult with no credit history
To start your credit as an adult, you have several options.
- Credit builder loans. Get financing while building credit - great if you need money, not great if you don’t.
- A loan with collateral. Some loan companies will provide secured personal loans using your vehicle or property. These work great if you need financing, but otherwise steer clear.
- Secured credit cards. A reliable and free way to start your credit score.
As a new immigrant
As a new immigrant or international student you may have been stumped by the SSN requirement on most credit card applications.
So, can you build credit without a social security number?
According to Experian, multiple factors tie your credit score to your identity, not just your SSN. Your credit report can still be created without a social security number to tie it to.
Experian doesn't match information to a person's credit history using only the Social Security number. -Experian.com
To get started building your credit, you’ll need to get an ITIN from the IRS. You can use your passport to get an ITIN, then get credit from a bank that will accept your ITIN instead an SSN.
Based on our research, the following banks accept ITINs as a valid taxpayer number.
|American Express||You can use an ITIN to apply online.|
|Bank of America||You can use an ITIN if you apply in a branch office but not online.|
|Capital One||You can use an ITIN to apply online.|
|Chase||You can use an ITIN to apply online.|
|Citibank||You can use an ITIN over the phone, but the process will be delayed.|
To start your credit, you need to establish a history of repaying your debts. Follow these steps to establish an excellent credit score within 6 months.
- Try credit piggybacking. Ask willing friends or family to add you as an authorized user on one of their accounts with excellent repayment history.
- Get for a secured credit card and keep it in good standing. Always pay your bills in full and on time, and keep your utilization below 20% at all times.
- Get a credit builder loan. If you need financing, a credit builder loan will start your credit and give you the funds you need. If you don’t need financing, stick to the secured credit card to avoid paying high interest.