When figuring out how to build credit, the best way to start is to get a secured credit card or become an authorized user on an already-established credit card.
But those aren’t your only options when it comes to establishing credit. Here are more ways to build credit — and how to maintain it once you’ve got it.
5 best ways to establish credit
Here are the best ways to build your credit and become a credit score superstar:
- Become an authorized user
- Get a secured credit card
- Apply for a credit-builder loan or secured loan
- Find a creditworthy cosigner
- Get credit for paying your rent
1. Become an authorized user
Best if: You have zero credit or bad credit and have a creditworthy friend or family member who is willing to add you on their account.
A creditworthy family member or friend can add you to one of their established credit card accounts as an authorized user. As an authorized user, the account will report to your credit, but you aren’t responsible for paying the charges.
If your trusted friend or family member agrees to add you on their account, it’s a good idea to double check that, as an authorized user, it’s actually reported to the credit bureaus (most are, but some may not be). It’s also smart to make a plan with the main account holder, so you both know what you can and can’t use the card for (or if you should be using it at all).
For example, a parent might add a teen to their credit card as an authorized user to help them begin building credit. But maybe the stipulation is that the teen only uses the card for emergencies, and if they do, they must pay that credit card debt back.
2. Get a secured credit card
Best if: You have poor to no credit and don’t have the option of being added as an authorized user on someone else’s credit card.
Applying for a secured credit card can help you safely start building your credit, especially if you have very poor credit or no credit at all. A secured credit card works the same as an unsecured credit card, except you back it with a cash deposit upfront — this is your line of credit. Most credit card companies and major banks offer secured credit cards.
You still use a secured credit card normally: make purchases against the limit you’ve set and pay it off in full each month — or accrue interest charges on the balance if you don’t. Since the cash you deposit is used as collateral, you will get it back, but only when you close the account, otherwise you keep using it to back your purchases.
Although not always the case, secured cards do tend to have higher interest rates than unsecured credit cards. So make sure to pay off your balance each month.
3. Apply for a credit-builder loan or secured loan
Best if: You don’t have good credit or you’re starting over completely after a financial crisis like a bankruptcy.
Credit-builder loans or secured personal loans work to help you establish credit by stashing the money away in an account while you pay off the loan. These loan options are reported to the credit bureaus as a personal loan, even when you don’t have access to the money yet.
You won’t have access to it until it’s fully paid off (including any interest you may end up paying), but once it’s paid in full, it will be in a savings account and yours to keep. Basically, it’s like layaway. But instead of paying off a Christmas gift, you’re paying for money (and to build your credit back up).
Many credit unions and banks (and a couple of online lenders) will also offer a secured loan using the money in your bank account for collateral. The loan amount is also typically very small — $1,000 or less.
4. Find a creditworthy cosigner
Best if: You have a trustworthy friend or family member with good to excellent credit who is willing to cosign a loan with you.
If getting a secured credit card or secured loan isn’t an option for you, you might consider borrowing money with a cosigner. This is when you apply for a loan or credit card and a friend or family member signs on with you.
Having a creditworthy cosigner will not only help you qualify for a loan you otherwise wouldn’t (like an unsecured loan), it can also give you a lower interest rate on the loan than other personal loan offers you might have. Keep in mind, though, that this isn’t the same as someone adding an authorized user to a credit card. Your cosigner is responsible for the debt if you can’t pay it back and this reports to their credit as well as yours.
Check Out: Personal Loan Lenders That Accept Cosigners
5. Get credit for paying your rent
Best if: You’re just starting out and don’t have a lot of bills or loans that are being reported on your credit history and don’t mind paying a small fee.
Not every credit bureau will take rent payments into account on your credit report, but some do. Your best bet is to find a service that will report your monthly rent payments to the credit bureaus — RentTrack and Rental Kharma are two options you can check out.
The downside here is that most of these services will charge you a fee (some simply upfront, some a monthly fee) and your landlord must verify your payments. But if you’re prepared to for a service to get your credit back in order, just make sure to shop around and find the one that works for you.
How to maintain credit
Once you’ve built your credit up, it’s important to learn good habits to maintain it. To do so, you’ll need to understand what makes up your credit score and work on it.
- Pay all your bills on time. If you miss a monthly payment on a credit or any other loan, it could go to collections. It’s important to always pay all of your bills on time during your loan term because on-time loan payments are a big part of what makes up your credit score.
- Keep your credit utilization low. You should aim to have a credit utilization ratio of 30% or less. This is the amount of money (or credit) you’re using based on your available credit is only 30%. For example, if your combined credit limit is $10,000, but you’re only using $2,000 of that, your ratio would be just 20% (which is good). The lower the ratio, the better.
- Don’t close credit card accounts. Sometimes you might think that you should close a credit card account simply because you don’t use the card anymore. But think twice before you do this. Keeping all of your credit card accounts open for more than just a period of time can help your credit score since it adds to the length of credit history. In some cases, however, if a credit card has an annual fee that you can’t justify or afford, you might need to close it. Just know that it can affect your score.
- Limit new credit. Opening up a new credit account, whether a credit card or loan, can bring your score down slightly because they cause hard credit inquiries on your credit report. New accounts will also lower the average age of credit you have, so always open a new account with this in mind.
Learn More: How Debt Consolidation Can Help Your Credit
Keep an eye on your credit report
The bottom line is that you need to continue to maintain your credit by checking your credit score and report regularly. You can get a free copy of your credit report once a year from AnnualCreditReport.com.
In addition to checking your credit for errors, you should also look for anything that could be evidence of identity theft or fraud — like previous addresses of places you’ve never lived or names of employers you didn’t work for.
Though not always free, all three of the credit bureaus offer credit monitoring services, as well. But first, be sure to check to see if your bank, credit card issuers, or another financial institution offers this for free — many do.
If you find yourself with too much debt which is causing your score to suffer, you might want to consider a debt consolidation loan. This can help if you’re struggling with high-interest credit card debt, student loan debt, car loans, or any other type of loan by getting you a loan with low interest rates compared to your current debt.