Building Your Credit

October 25, 2021 Leah Driver

Building Your Credit

We know how important a good credit score is, but if you've never had credit before, how are you supposed to get started? There are several good options for building your credit. The "best" one depends on your future goals and current situation.

Not so long ago, younger people would receive pre-approved credit cards based on future earning potential. This was a double-edged sword. It made building credit easy, but was as likely to result derogatory credit marks. The CARD Act (Credit Card Accountability, Responsibility and Disclosure ) was passed to stop companies from issuing cards to those under 21 unless they apply and can show they have a current source of income to pay for any charges.

There are still options for building your credit, including:

Get a Secured Credit Card
Credit Cards
A Secured Credit Card requires collateral - usually depositing money into an account with the credit card issuer. That amount, often around $500, is then the spending limit for your credit card. If you miss a payment, the funds are withdrawn from your deposit account.

There are a few things to consider before opening a Secured Card. Read the fine print. Many companies will charge annual and monthly fees in addition to other "miscellaneous" charges. During the first year, you can't be charged more than 25% of your credit limit in fees, but there's no such limit after that. Ensure the lender reports your payment history to the credit agencies. Finally, check the terms of the card to be certain you follow all the rules.

Credit Builder Loan
Apply for a Credit Builder Loan

You can think of a credit-builder loan almost like a reverse loan:

  1. You'll apply for the loan, and if it's approved your lender will set aside the approved amount in a savings account or CD. (Usually $300 - $1,000.)
  2. You'll make monthly payments toward the loan, including interest, generally from 6 - 24 months.
  3. You lender should report your payments to the credit bureaus every month. (Check the fine print before you finalize such a loan to ensure your payments are reported.) Keep in mind, missed or late payments will be reported as well.
  4. When you've made all your payments by the end of the loan's term, you'll receive your funds.
Become an Authorized UserCredit Card Authorized User

I used this option for my two sons, and it worked for us. In this scenario, you're added to a credit card account as an Authorized User. You'll receive a card you can use, but you're not responsible for the account. Ideally, the account owner uses the card and makes on-time payments every month. If the card isn't used, nothing is reported to the credit agencies, and late payments could hurt your score. A huge "pro" for this option is there are no fees or costs involved and no fine print to worry about. A potential negative is that you're not in control of payments and this doesn't build your credit as quickly as other methods.


Loan Co-Signer
Get a Co-Signer

You can always ask a friend or family member to co-sign a loan for you. A co-signer agrees to repay the loan if you're unable to do so. While this is an effective method of building/rebuilding your credit, it can be tricky. If your co-signer has good credit, a lender is more likely to approve your loan. Keep in mind if you pay late or miss any payments, your credit and your co-signer's will take a hit. If you're unable to repay the loan, the co-signer will be responsible to pay it in full. This can be awkward situation, to say the least.


Make a Large Down PaymentDown Payment

Making a large down payment will increase your odds of being approved for a loan. Even if you don't have a credit history, many lenders will be more willing to work with you. If you plan to use this method to build your credit, get "pre-approved" for your loan before you go shopping. This will give you time to compare interest rates and repayment terms, and you know your application will be approved.


Retail Credit Card
Apply for a Retail Credit Card

Many retailers offer cards with lower spending limits and higher interest rates - but they're more likely to approve those without a credit history. If you do this, make sure you set yourself up for success by using the card sparingly and making payments on time. (Or, even better, paying the card in full and not carrying a balance from month-to-month.) Responsible card use will help you quickly build your score.

Additional Resources:

Credit Reports and Credit Scores (FDIC)
How Money Smart Are You? Resources
Consumer Financial Protection Bureau (CFPB)

The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.

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