How to establish and build credit

Credit is important. Having good credit can make it easier to rent an apartment, take out a car loan or buy a home, among other things. But it might not be obvious how to establish credit.

Luckily, there are several ways to start building credit. The general idea is to build a positive history through responsible credit use over time. 

What you’ll learn:

• Opening a credit card, becoming an authorized user and applying for a credit-builder loan are some ways to establish credit.

• Building good credit relies on using credit responsibly by doing things like making on-time payments every month and maintaining a low credit utilization ratio.

• To establish a FICO® score, you’ll need at least one credit account reporting to one of the major credit bureaus for at least six months. 

• You could get a score from VantageScore® the first time your new account gets reported to the credit bureaus.

• After establishing credit, you can monitor your credit scores and reports to keep track of your progress.

There are several ways to establish credit. In fact, any credit activity that’s reported to the credit bureaus can help you start building up your credit scores.

But one thing is consistent: Once you have a credit card or loan, it’s important to use it responsibly to build credit. 

One way to show responsible use is to consistently make on-time payments. This helps create a positive payment history, an important factor affecting your credit scores. Another way is by keeping your credit utilization ratio low. It’s an important factor in determining your credit scores, and the Consumer Financial Protection Bureau (CFPB) recommends keeping your credit utilization ratio under 30%.

With that in mind, here are four ways that can help you start building credit.

One way to establish credit is with a credit card. But without a credit history, it can be difficult to get approved for an unsecured credit card. But there’s another option known as a secured credit card. 

A secured card requires a refundable deposit to open the account. The cardholder typically makes a one-time security deposit that acts as collateral for the credit card issuer. Using a secured card responsibly can help you build your credit, as long as the account is reported to at least one of the three major credit bureaus.

After demonstrating responsible use over time, some credit card companies may allow you to upgrade from a secured card to an unsecured card.

Being added as an authorized user to the credit card account of a trusted family member or friend is another way to build credit. As an authorized user, you’re allowed to make purchases. But the primary cardholder is responsible for the account, including making payments. Some issuers, like Capital One, may also provide a separate card and online access for eligible authorized users. 

If the card issuer reports the card activity of authorized users to the credit bureaus, you may be able to benefit from the primary cardholder’s credit history. But negative actions, like late payments, could negatively impact the credit of both the primary cardholder and the authorized user.

There are also ways to build credit without a credit card. Credit unions and community banks may offer credit-builder loans. These small loans, which can range from about $300 to $1,000, are designed to help build credit history. 

With a credit-builder loan, the lender deposits the loan amount into a locked savings account. Over a fixed period, the borrower pays it back with relatively small payments. Because the lender reports payments to the credit bureaus, credit-builder loans can help establish credit. And once the loan is paid off, borrowers get access to the money in the savings account.

You may be able to build credit just by paying your bills. Some credit bureaus have developed alternative scoring methods that consider information not typically used in credit reporting, such as rent, car insurance, phone bill payments and bank account transactions. If this data isn’t automatically getting reported to the credit bureaus, you may be able to use self-reporting services.

Once you’ve established credit, CreditWise from Capital One can help you monitor your progress and better understand your credit score. It’s a free tool available to everyone, and it provides a personalized summary of key factors that may affect your credit scores.

Another way to stay on top of your credit is to check your credit reports. You can get free credit reports from all three major credit bureaus by visiting AnnualCreditReport.com.

If you’re just starting out, you’ll need a credit account that’s reported to a major credit bureau for at least six months to generate a FICO credit score. FICO scores are used by 90% of top lenders.

According to credit bureau Experian, you could get a VantageScore credit score the first time activity is reported to a credit bureau.

There’s no one-size-fits-all answer to how long it takes to build credit. Building good credit takes time, and there are no shortcuts. But each time you use your credit responsibly, you can get one step closer to improving your scores.

There are numerous ways to establish credit. But whatever method you choose, it’s critical to use credit responsibly.

If you’re new to credit or searching for your next credit card, Capital One can help. 

• See whether you’re pre-approved for credit cards without harming your credit scores. 

• If you’re looking to build your credit with responsible use, explore cards for people with fair credit. 

• Earn unlimited 1.5% cash back on every purchase, every day, with a cash back rewards card. 

• Monitor your credit report and score with CreditWise. It’s free for everyone, and using it won’t hurt your credit.