A Guide to Establishing Credit for the First Time (2024)

Why You Should Start Building Credit Early

Young people often have limited experience with credit and don't realize all the ways that having good credit makes certain aspects of life easier—and more affordable. Here are some ways building credit while you're young can help you now and later.

• Renting an apartment: Landlords typically check an applicant's credit report before approval to see if there's a history of on-time bill payment or risks like late payments and high debt. Prospective tenants with poor or no credit might be denied, be required to pay a higher security deposit or need a cosigner or guarantor on the lease.
• Getting your own utilities: Utility companies—including power, water, internet and phone providers—often run a check credit for new customers. Without a credit history, you may not yet be able to open accounts in your own name, or you'll have to pay a deposit in order to be approved.
• Applying for credit: Your credit history and scores influence whether financial institutions approve or deny your loan and credit card applications. Established credit makes you more likely to get approved and receive better terms, such as lower interest rates.
• Landing a job: Some employers run credit checks on job applicants for a sense of their financial health and responsibility. It's possible this will be a factor in your job hunt, though some cities and states restrict credit reports from being used when hiring.
• Obtaining insurance: While you may still be on your family's car insurance policy, that won't always be the case. In some states, your credit history can impact insurance rates, with better credit potentially lowering premiums.
• Refinancing loans: If you take out private student loans that have steep interest rates, for example, you could refinance them later at a lower interest rate if you have good credit and a steady job.

What's the Best Way for a Young Person to Build Credit?

There are many ways to build credit, and all involve actions that result in creditors reporting your payment information to the major credit bureaus: Experian, TransUnion and Equifax. To get started, try one or more of these options.

1. Open a Student or Secured Credit Card

You can open your own credit card starting at age 18. College students can apply for a student credit card, which is often easier to get approved for as a first credit card than a regular card. However, student cards are unsecured credit cards, so if you're under 21, you likely won't get approved unless you have proof of your own income or a parent cosigns.

If you can't qualify for a student card, or you're not in school, consider a secured credit card to start building your credit instead. These require a security deposit, which typically becomes your credit limit. Secured cards are typically easier to obtain than regular unsecured cards since the deposit reduces the card issuer's risk. While timing can vary, if you use your card responsibly for six to 12 months and pay all its bills on time, your card issuer may upgrade you to an unsecured credit card and return your deposit.

2. Become an Authorized User on a Parent's Credit Card

If one or both of your parents have a good credit history and use credit cards responsibly, consider asking them to add you as an authorized user. You'll likely receive your own card connected to their account, but you don't have legal responsibility to pay the bill—though your parents might require you to pay for your purchases!

Some card issuers report authorized-user activity to the credit bureaus, which is one way to start building credit. Not all issuers report authorized users, however, so make sure your parents' issuer does so you'll benefit.

3. Pay Student Loans on Time

If you've borrowed, or plan to borrow, student loans for college, lenders usually report your accounts and payments to the credit bureaus. Consistently making on-time loan payments can have a big impact in building positive credit history. Even if you defer making payments until after you finish school, student loans can help you establish good credit—if you make your payments on time every month once you start paying them back.

4. Take Out a Credit-Builder Loan

Geared toward building credit rather than borrowing money, some lenders offer a product called a credit-builder loan.

With traditional loans, you borrow a lump sum of money and make monthly payments until it's repaid. Credit-builder loans still require monthly payments, but instead of you getting money upfront, the financial institution sets aside the loan amount (usually $300 to $1,000) in a savings account. You receive the money after making all monthly payments.

You'll generally have to pay interest, but some lenders may return all or a portion of that interest once you've fully paid the loan. While you're not actually borrowing money, payments on credit-builder loans are typically reported to the credit bureaus like regular loans (make sure yours is reported to all three credit bureaus). This helps you build credit and savings at the same time.

5. Add Monthly Bills to your Experian Credit Report

Typically, utility bills don't show up on your credit report since they're not a form of borrowing money (unless you don't pay and it goes into collections). But there's a way around this. If you're responsible for your cellphone, utility, internet and streaming bills, you can add these accounts to your Experian credit report with Experian Boost^®ø. Once they're in your report, on-time payments could help improve your credit history and increase your credit scores.

6. Create an Experian Credit Report With Experian Go™

If you don't have a credit report at all, Experian Go helps you jump-start the process. You'll sign up for a free Experian membership and answer a few questions about your financial habits. Experian Go will then recommend the best ways for you to start building credit history, along with providing tools and insights.

Common Mistakes Young People Make When Building Credit

Young people who are brand new to credit can be vulnerable to making mistakes or believing credit myths that will actually set them back. Aim to avoid these common mistakes:

• Missing payments: Payment history is the biggest factor in your credit score, so even one credit card or loan payment made over 30 days late can lower your score. If you're consistently late or fall far behind on payments, your account might be sent to collections, which may also appear on your credit report. Late payments and collection accounts remain on your credit report for seven years and can hurt your credit during that time. Setting up automatic payments can help you avoid accidentally missing bills.
• Forgetting closed accounts: Similarly, if you close an account that still has a balance, such as a utility or cable account when you move, make sure to pay off the balance. An unpaid bill could be sent to collections.
• Accumulating excess credit card debt: You don't need to maintain a credit card balance to build credit—in fact, it's best to pay your bill in full each month to avoid interest. Access to credit cards might tempt you to buy things you otherwise couldn't afford, but that could land you deep in debt. When you can't pay the month's charges in full, you'll pay interest on the remaining balance. Depending on the card's interest rate, this can rapidly grow your balance, with your minimum payment making a minimal dent. Ideally, treat your credit card like a debit card, only using it for purchases you can pay off within a month.
• Not paying balances in full: Besides avoiding interest, paying off your monthly credit card bill keeps your credit utilization low. This is how much of your available credit you're using at a given time, and it's an important factor in your credit score. To help your credit, experts recommend keeping your utilization ratio under 30%. For example, this means not carrying a balance above $300 on a card with a $1,000 limit.
• Submitting frequent applications: When lenders review your loan or credit card application, they request a copy of your credit report, which results in a hard inquiry on your credit report. One hard inquiry can lower your credit scores slightly and temporarily, but multiple inquiries in a short time can increase the negative impact and cause you to appear financially risky.

How Long Does It Take to Establish Credit?

Your credit file is established as soon as your first credit account is reported to the credit bureaus (or if you use Experian Boost or Experian Go to get an Experian credit report). For most people, this is at age 18 or later, unless they had a credit report earlier due to being an authorized user.

However, it can take up to six months of payment history to establish a credit score. Additionally, if you have fewer than five credit accounts, also known as having a thin file, lenders and credit scoring models may not have enough information to assess your creditworthiness just yet.

How to Monitor Your Credit

As you start establishing credit, consider signing up for credit monitoring to watch your progress. This also gives you a chance to catch errors or fraud that could hurt your credit; you have the right to file a dispute if you find information you think was reported in error.

There are no-cost options such as Experian's free credit monitoring, which provides access to your Experian credit report and score along with helpful tools and tips. You can also get free weekly online credit reports from all three credit bureaus at AnnualCreditReport.com.

Frequently Asked Questions

• Minors won't typically have a credit report unless their information was used for fraud or they're an authorized user on someone's credit card. Some issuers don't set a minimum age for authorized users, while others require them to be at least 13 or 15. If you become an authorized user before 18, and the card issuer reports authorized user activity to the credit bureaus, you can start building credit (some may not begin reporting payments until the authorized user is 18).

  However, most people won't start establishing credit until they turn 18, when they can legally have their own credit card, loans and bills.

• There are five factors that determine your FICO^® Score^☉ , the scoring model used by 90% of top lenders.

  Your FICO^® Score is calculated based on the following, in order of importance:

  1. Payment history (35%): On-time payments help, while late or missed payments can hurt your credit score.
  2. Amounts owed (30%): Excessive debt and a high credit utilization rate can lower your score.
  3. Length of credit history (15%): The longer your credit history, the better for your scores.
  4. Credit mix (10%): It can benefit you to show experience with a mix of installment debt like loans and revolving credit accounts like credit cards
  5. New credit (10%): You can be penalized for too many hard inquiries in a short period of time (unless you're rate shopping for a specific type of loan, such as a car loan).

• The most impactful way to maintain strong credit is to pay all your bills on time, every time. It's also key to minimize how much debt you carry and not use more than 30% of your available credit on credit cards.

  Since length of credit history counts toward your scores, keep accounts open if they're in good standing, even if you rarely use them. Consider putting a recurring monthly payment, such as a streaming service, on your card and pay it off each month to keep the card active.

  It helps to periodically review your credit report to ensure there aren't errors or fraud, both of which could hurt your score. If you find what you believe to be mistakes, you have the right to dispute them. Also, space out applications for new loans or credit cards to minimize the impact of hard inquiries.

The Bottom Line

As you turn 18, there's surely a lot more on your mind than your credit score, but putting in the effort to start establishing credit now will give you a leg up in early adulthood and pay off for years to come.

Because the age of your accounts is a credit scoring factor, the longer you've had open and active accounts, the better (assuming you make on-time payments). While this takes some time, you're making a long-term investment in your financial future and establishing credit while you're young—which is better than waiting until you need to apply for a rental apartment, job or loan.