Dear Penny: I Have No Credit History. How Do I Get Started?

A woman uses a credit card at a store.
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Dear Penny,

What's the best way to get my credit started? Some of my friends say to start off with something like getting a phone or with layaway. Are they right, or is there a better way to go about it? 


Dear P.,

Let’s start by acknowledging an annoying Catch-22: It’s hard to get credit when you don’t have a history of using credit responsibly.

When we talk about credit, we’re basically talking about borrowing money. If you have good credit — which is reflected in how high your three-digit FICO score is — you’ve shown you can manage debt responsibly, and your creditors have relayed that information to the three credit bureaus. Lenders see you as statistically likely to pay back the money you borrow.

Layaway isn’t a form of credit. You make regular payments until you’ve paid for your purchase. If you don’t make your payments, you simply don’t get the goods. Either way, the credit bureaus don’t get involved.

It gets trickier with bills for things like phone, utility and internet accounts. Most providers don’t report your on-time payments to the credit bureaus. But if you get behind on payments and your account goes into collections? You can be sure the bureaus will hear about it.

OK, that was a long-winded way to say that your friends are confused about how to build credit. But fortunately you didn’t pick the Phone-a-Friend option on “Who Wants to Be a Millionaire,” so this isn’t game over. You have plenty of options for establishing credit.

Getting a credit card is usually the easiest option. To open one, you need to be at least 18. If you’re under 21, you’ll have to show that you earn sufficient income. (Technically, you could also qualify with a co-signer, but cards that allow co-signers are increasingly rare.)

The interwebs are filled with marketplaces that let you quickly compare cards and apply for offers. If you have an account at a bank or credit union, you could also ask them about their options.

Look for starter credit cards, which are designed for people with no credit or poor credit. They usually have low credit limits — say $300 or $500 — and don’t come with many perks, but that’s OK. Your goal right now is to build credit, not to fly around the world with rewards points.

You may need to start with a secured credit card, which requires you to put down a security deposit and use your deposit for credit. Usually, after about six months to a year’s worth of on-time payments, your bank will let you switch to an unsecured card and you’ll get your deposit back.

A store credit card (the kind that doesn’t have a Visa or Mastercard logo and can only be used at a certain retailer) may be an option. Just know that these have several risky features, including higher interest rates.

A less-common option is a credit-builder loan, which is where you borrow a relatively small amount — say $1,000 — and the money is placed in an account. You make payments on the loan, and once you’ve finished making your payments, you get your money. Look for credit-builder loans online or at credit unions and smaller banks; big banks are less likely to offer them.
Once you’ve gotten that first credit card or loan, the most important thing you can do is make your payments on time, because your payment history determines 35% of your FICO score — more than any other factor.

If you get a credit card, aim to pay off your balance in full each month. If you need to carry a balance, keep it as low as possible. Experts usually recommend using no more than 30% of your limit to build a good credit score.

Establishing good credit takes time, but if you’re diligent about making payments and keeping your spending in check, you’ll usually see your credit limits increase, and you’ll qualify for bigger loans.

A little proactivity goes a long way with credit. By taking a few easy steps now, you’ll be in a great position later on should you want to make a larger purchase, like a car or home.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your questions about building credit to [email protected].