How to Build Credit

Get tips on the best ways to build credit—even if you’re a young adult.

Laura Adams, MBA,
April 12, 2010
Episode #169

Money Girl's Quick and Dirty Tips for Building Credit from Scratch

In past articles I’ve talked about the importance of your credit score and ways you can increase it. But increasing your credit score is even more of a challenge when you’re also building it for the first time. You’ve heard of a catch 22? It’s like this: You can’t build a credit history without a credit card or loan, but you can’t get a card or loan without a good credit history! Financial institutions have credit standards that are stricter than ever these days. And if you’re a young adult it’s even harder: financial institutions generally aren’t sympathetic to the fact that as a young person, you simply haven’t had much time to establish credit.

Building Credit is Hard for Young Adults

The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 just made it even tougher on young people. Card companies used to set up booths on college campuses and offer promotional goodies to entice students to sign up for a credit card. Not anymore. Those types of marketing efforts are now prohibited. The regulations that kicked in earlier this year put a real damper on the credit party. They put a new spin on the term “getting carded”. Now, if you’re under the age of 21, you have to show sufficient income or assets to get a credit card.

How To Build Credit If You’re Younger Than 21

So, what’s a youth to do? Let’s start with what’s possible if you’re under the age of 21. There are two options. You can ask someone who’s at least 21 and creditworthy to co-sign a new credit card account with you. Or you can become an authorized user on a parent’s existing credit card account. When you share an account with a friend or family member, all the account activity appears on both your credit reports. That can be fantastic unless the other person makes late payments or maxes out an account, which would be harmful to both your credit scores. Therefore, you should never enter into a joint account lightly. You run the risk of hurting your credit if something goes wrong with your co-owner’s personal finances or motivation. With a co-signed account, always sign up for online access and payment alerts so you can closely monitor spending on the account.

How to Build Credit If You’re Over 21

Don’t set your sights on a jumbo mortgage or a fancy car loan, for example, until you’ve taken some credit baby steps.

If you’re over 21, your first priority should be to focus on the kinds of credit that are the easiest to get. Don’t set your sights on a jumbo mortgage or a fancy car loan, for example, until you’ve taken some credit baby steps. There are four main types of credit cards that you can use to build your credit:

How to Use a Secured Credit Card to Build Credit

Let’s review each of those cards and see how they might be used as a tool to ramp up your credit. A secured credit card requires you to put up a deposit in exchange for credit. The minimum deposit amount varies by card. For example, if you deposit $300, you might be allowed to make purchases that total $300. Your deposit is returned after you close the account or prove your creditworthiness. If you abuse a secured credit card—yup, you guessed it—they use your deposit to pay off your debt.

You’ll want a secured card that reports your payment history to the major credit bureaus and doesn’t charge monthly or annual fees, like the Public Savings Bank Classic Visa®. That way if you consistently make payments on time, your credit score will improve and move you closer to getting a regular, unsecured credit card or an installment loan. Visit Creditcards.com where you can research more secured card offers.

How to Use a Retail Store Card to Build Credit

Another option to start building credit is to open up a retail store card. They can be easier to get than a regular credit card. It seems that whenever I shop at a store like Nordstrom or J. Crew, the checkout clerk offers me a store card. They usually come with some kind of perk, like 15% off your first purchase, for instance. The downside is that store cards charge high interest rates. So, if your goal is to build credit, consider opening up a retail account at a store where you already shop. Try checking their website to see if they offer a store card. If you get one, charge something small from time to time, but pay off your balance in full by the due date each month. If you do that, the interest rate doesn’t matter because you’re never charged interest when you don’t carry a balance from month to month.  These cards can be handy for other things as well, and you can find out what they are by checking out this episode.

How to Use a Gas Station Card to Build Credit

Just like with retail store cards, a gas station card can be a great tool to build your credit—if you use it wisely! These kinds of credit cards also charge high interest rates and offer low credit limits. Some gas station cards require you to pay your balance off in full each month. If that’s the case, they’re not “revolving” accounts and don’t report your payment history to the credit bureaus. Having a card like that won’t do you any good if you’re trying to build your credit. Revolving accounts, on the other hand, are those that allow you to defer payment on part of the balance and they do affect your credit. So if your goal is to increase your credit score, a gas card with a revolving account is what you want. Check out cards offered by BP and ExxonMobil for starters.

How to Use a Subprime Credit Card to Build Credit

Another type of card that’s available if you have a short credit history is a subprime credit card. They’re real credit cards with sky-high interest rates (some as high as 30%!) and usually come with low credit limits and extra fees. So, use subprime cards with extreme caution. Remember that the only reason to use one is to build up a strong payment history, not to rack up huge interest charges. Find subprime offers on sites like Bankrate.com and Creditcardguide.com.

My quick and dirty tip for using these alternate types of credit cards is to make small purchases that you’re absolutely sure you can pay off in full each month. That way you never get hit with outrageous interest charges and you prove that you know how to handle credit. Your credit baby steps will start to pay off. You’ll establish credit, your credit score will increase, and you’ll qualify for loans or credit cards with reasonable terms. You’ll find links to all the websites I mentioned at the bottom of this page.

For more information about credit scores please check out my Quick Tip about which factors affect your credit score the most.

Money Girl’s 10 Steps to a Debt Free Life

If you prefer to read a book rather than listen to it, you’re in luck! Money Girl’s 10 Steps to a Debt Free Life is now available as a short e-book that you can purchase in the Amazon Kindle Store, the Sony Reader Store, the Fictionwise E-bookstore and more. Learn how easy it is to get out of debt and stay out of debt for good--for less than $4.00! Take control of your finances and create a more secure future.

More Resources:

CARD Act Fact Sheet

Girl with Credit Card image from Shutterstock

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