Build Your Credit Score

Getting your first credit card can be a challenge. Few banks will offer a credit card to someone without a credit history, so how do you build that history? 

You’re not facing this problem alone. About 50 million Americans don’t have a credit history. That can make it difficult to buy a car or a house or make any other major purchase you might be considering. You may even find it difficult to rent a car or stay at a hotel without a credit card. Luckily, there are a number of strategies to help you get that first credit card.

It’s easiest if you are a college student. Many banks have credit cards designed specifically for college students. If you are in college, check with nearby banks to see if they have any special credit card programs for students. Some cards are better than others so choose among the ones that are the best fit.

If you’re not in college, there are a number of ways to get started. The easiest and least costly way is to find someone to cosign your credit application – for a credit card or perhaps, a car loan. If that’s not an option, two other helpful strategies are getting a secured credit card or taking out a credit builder loan.

Finding someone with excellent credit who is willing to cosign a credit card or loan application can help in two ways: 1) You’ll get a better interest rate and, 2) You’ll be able to more quickly build a good credit score because your score will be helped by your cosigner's good credit history. Be sure to pick a cosigner with good credit or you could end up with a negative credit history. Often one’s parents or siblings are the best option. Co-signers should be aware of the risks.

One way to avoid the risks for both the borrower and cosigner is to be sure payments are on time. If not, you will hurt both your credit history and the credit history of your cosigner if you are late in making payments. If you think you may miss a payment, be sure to talk with your cosigner before your loan is past due. He or she will likely help you avoid making a negative mark on both of your credit scores.

Another option for starting out is a secured credit card. What you do is deposit in the bank the amount of money you want to have as a credit line. For example, if you want a $300 credit limit, you must deposit $300. 

No one can tell the card is secured; they look the same and you use them as you would use any other credit card. The primary difference is that the bank takes no risk in offering you this type of card. You’ve secured the debt with the amount you have on deposit.

Lenders charge a fee to provide this “starter” service that can range from $29 to $100 per year, so shop carefully. Find the card with the lowest annual fee. Interest rates will be high, so avoid them by paying your bill in full each month. That way you’ll build a good credit history and demonstrate that you are a responsible credit user.

Most lenders will let you graduate to an unsecured credit card in 12 to 18 months. If you’re good about paying your bill on time and have a good job, you could apply for an unsecured credit card within six to eight months. Once you get an unsecured credit card, cancel the more expensive secured card. 

You can build a good credit history (which is different from a credit score) without using credit cards by working with a local credit union that offers credit builder loans. When you get this kind of loan, the credit union deposits the amount of the loan into an interest-bearing account. As you make payments on the loan, the credit union reports your on-time payment history to the credit bureaus to help you establish a positive credit history. A credit report is a record based on an individual's credit history. A credit report is used by credit bureaus to form a credit score. When the loan is paid off, you get back the money in the interest-bearing account, plus the interest earned. 

"Everyone wins," says John Ulzheimer, credit expert and founder of CreditExpertWitness.com. "The consumer gets the benefit of the account on their credit reports, plus the loan proceeds with interest. The credit union has an almost risk-free borrower and a happy member." 

Getting credit can be a catch 22. You need a good credit history to get credit, yet you can’t get good credit offers until you have a good credit history. You need to start building your credit history with options that may cost you a bit more in the beginning. After you’ve shown creditors you are a responsible credit user who pays bills on time, you should be able to get competitive interest rates in as early as six months to a year.