What's the Best Way to Build Credit for the First Time?

Once upon a time, college students and others in their early twenties (or even late teens) could get any number of credit cards without having a prior credit history, making it easy to start to build credit. In today’s tightened credit markets, however, the road to building good credit in college or in your early twenties is a bit more difficult. If you don’t have credit yet but hope to buy your first home or get another type of loan in a few years, what are your options?

It’s possible to build a good credit history with around two years of on-time payments on an account that is reported to the credit bureaus. Typically, these accounts include any major credit card or installment loan like a mortgage or car loan. Although other billors like cell phone and utility companies may report negative information to credit bureaus if you don’t pay, they typically don’t report your on-time payments.

Applying for one or two credit cards, using them occasionally and paying them off in-full each month has long been the preferred way to build credit quickly. Today, however, many first-time borrowers may not be approved for most credit cards. College students enrolled full-time with no negative credit history may still be able to get qualified for student cards like the Discover Student Card.

Another option is to ask your local bank or credit union about credit cards for first-time borrowers. Many banks will be more willing to open credit cards for borrowers without credit histories but who have an existing relationship with the bank.

If you have taken out federal student loans, they can help you build credit, although they will not start reporting to credit bureaus until you begin making payments, typically between six and eight months after you graduate. That’s not ideal if you dream of buying a home soon after graduation.

If you need wheels, an auto loan with a co-signer may be able to help you build credit. Although you may have difficulty getting an auto loan without a credit history, most auto lenders allow co-signers. If your parents have good credit and are willing to help, ask them to co-sign a 24- or 36-month auto loan for an affordable used car. Then pay off the loan on-time (and early if possible) to minimize interest payments.

They key to building credit quickly is to open a small variety of accounts (one or two credit cards and one or two fixed installment loans) and to pay all on time, every time. Check your credit score and report periodically to make sure you’re on track. Done right, it’s still very possible to build credit quickly without going into debt.

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