A person is considered “new to credit” if they’ve had their own loan or credit card for less than three years (or have never had one at all). This term is typically used to describe college students, recent immigrants, young adults, and recently divorced or widowed individuals who’ve had no credit in their name for the past 10 years.
It’s very important for anyone with limited or no credit history to begin their credit careers on the right foot. But personal finance, and the credit card industry in particular, can be extremely confusing to navigate. Below, we’ll cover some of the most common topics that people who are new to credit want to know about in order to ease your transition into credit management.
Why Is Credit History Important?
Your credit standing is extremely important because having a good or excellent credit score will save you a lot of money on financial products ranging from credit cards and mortgages to auto loans and insurance policies. A high score will also make it easier for you to get approved for credit cards and loans in the first place, and will increase . It can help you find certain types of jobs, rent an apartment, and lease a car too.
Having no credit or limited credit isn’t necessarily a bad thing, considering that everyone must start somewhere. However, having limited or no credit and simply ignoring that fact is a big mistake that can cost you money. When you do try to open a credit card or a loan, you’ll get much worse terms and have much more limited product options than people who have already established credit. Without a track record of responsible financial management, financial institutions and other decision makers will have little reason to trust that you will pay your bills on time.
In short, building above-average credit will simply make your life much easier.
How to Build Credit With No Credit History
The easiest way for most people to build credit is to keep one or more credit card accounts in good standing. Whether you lock your card in a drawer or use it responsibly (i.e. pay your bill on time, minimize unnecessary debt, and maintain a low credit utilization ratio), your creditor will relay positive account information to the major credit bureaus each month. That will beef up the files on which your credit scores are based. The other great thing about a credit card, compared to a loan, is that you won’t have to pay any finance charges if you pay your bill in full every month.
Keep in mind that if you’re new to credit, it’s going to be difficult for you to get a regular credit card because lenders have little way of knowing whether or not you are a trustworthy candidate. You can prove it to them by getting a secured credit card, which requires a deposit that acts as collateral against your credit limit. Once you have shown that you can manage a secured credit card responsibly for about a year, it is likely that your credit card company will offer you the chance to apply for a regular credit card.
You can learn more with WalletHub’s guide to building credit.
At What Age Can You Start Building Credit?
While you can’t get your own credit card account until you turn 18 years old, that doesn’t mean you have to put your credit building efforts on hold until then. Rather, you can ask a parent or guardian to add you as an authorized user on one of their accounts. Some credit card issuers have no minimum age for authorized users, and those that have a minimum may set it as low as 13 years old.
Being an authorized user allows you to share the primary cardholder’s credit line and make purchases without having any responsibility for making payments. Assuming the primary accountholder pays on time, you will benefit from modest credit score gains as an authorized user. This may enable you to get a better starter credit card when you first apply on your own.
You can learn more about the pros and cons of such an arrangement in WalletHub’s authorized user guide.
How to Get a Credit Card at 18 to 21 Years Old
If you’re 18 to 20 years old, you must be able to demonstrate the independent income necessary to afford at least the minimum required monthly payment on a credit card. This won’t be a particularly large amount of money for a starter credit card with a low credit limit, but it’s still important that you have some source of income.
Potential income sources could include a part-time or full-time job, investments, disability payments, unemployment benefits, an allowance deposited into your bank account, or even scholarships and grants for school.
Once you’re at least 21 years old, you can start including income you have reasonable access to from another household member, such as your spouse. For example, if you make $30,000 and your spouse makes $40,000, you can list a $70,000 income.
Getting a Credit Card With a Co-Signer
The other alternative is to have a more financially-established relative or friend co-sign on your credit card account. This person must be at least 21 years old and have the means to repay any debt that you may incur. The co-signer will be liable for your credit card debt if you can’t pay it back. However, none of the biggest credit card companies allow co-signers at this time. The option may be available at smaller banks and credit unions.
You can learn more about the best credit cards for 18-year-olds here on WalletHub.
What Type of Credit Card Should You Get?
When you’re new to credit, the particular credit card options that are at your disposal depend on a number of different factors, including your age, the extent of your credit history, how much money you make, and whether or not you’re still in school. That information will dictate whether you should get a student credit card, an unsecured credit card for limited credit, or a secured credit card – the three types of cards targeted to inexperienced consumers. If you’re younger than 18 years old, you should simply become an authorized user instead.
Authorized User
If you’re younger than 18 years old, the only credit card option for you is to become an authorized user on someone else’s credit card account. This can help you build credit history, which means that once you turn 18 you’ll likely have access to better credit card offers than your peers who have no credit.
Just make sure that you only become an authorized user on the account of someone you know will handle their card responsibly. Otherwise, mistakes like late payments and high credit utilization can hurt your credit score, too.
Student Credit Cards
If you’re currently a student (or your university e-mail address is still active), go the student credit card route. Credit card companies tend to offer college students more attractive account terms than their credit standing would ordinarily merit due to their above-average earning potential and the years of financial independence (i.e. years of revenue-generating opportunities for banks) that lie before them.
In other words, student cards often cost less than other cards for people with limited credit while giving more attractive rewards and benefits.
Unsecured Credit Cards for Limited Credit
If you aren’t a student and you trust yourself to spend within your means, compare unsecured credit cards for limited credit in order to find an offer that meets your particular needs and submit an application.
The benefit of an unsecured card is that it gives you true spending power, since you’re not borrowing against a security deposit. You’re likely to start out with a pretty low credit limit, though. In addition, unsecured cards don’t offer quite as good approval odds as secured cards, though unsecured cards specifically targeted toward people with no credit are still pretty easy to get.
Secured Cards
If you can’t get approved for an unsecured card or you’d rather have nearly guaranteed approval off the bat, simply place a deposit on a secured credit card instead. Numerous applications within a short period of time can hurt your credit score, as each one leads to a hard pull on your credit report, so going straight for a card you know you can qualify for is a good idea.
Here are a few key things to know about secured cards:
- Secured credit cards work just like regular credit cards and are reported to all the major credit bureaus.
- Your line of credit (i.e. credit limit) will likely match the amount of your security deposit. Secured cards usually require a minimum deposit of $200+.
- The deposit prevents overspending, precludes the need for issuers to charge high fees, and essentially guarantees account approval.
- You can typically increase your spending power by adding to your deposit over time. This in turn will expedite your credit building efforts, considering the importance of available credit to credit scoring formulas.
You can therefore practice sound financial habits with a secured credit card at very low risk to both yourself and your credit card company. Once you’ve managed to pay your secured credit card bill on time for 6-18 months, you can switch to an unsecured line of credit and challenge yourself to not spend more than you should.
Regardless of the particular type of credit card you decide to apply for, make sure not to get distracted by interest rates and rewards at this stage in your credit career. Instead, strive to pay your bill in full every month and look for a card with no annual fees in order to minimize the cost of credit building. If you can get a card with rewards and no fee, even better.
You can browse the best first credit cards here on WalletHub.
How Long Does It Take to Build Credit From Scratch?
It doesn’t take very long to build some credit from scratch – only one month with the VantageScore model or six months with the FICO model. However, that’s just to have a credit score in general.
How long it takes to build your way to at least good credit depends on how responsible you are, but it can often take several years. You’ll improve your score the fastest if you always make your credit card and loan payments on time, pay your credit card balances in full each month, and keep your credit utilization low.
For more information, check out WalletHub’s guide on how long it takes to build credit.
How to Check Your Credit Score for Free
There are many different sites you can use to check your credit score for free, including WalletHub. Checking your score on WalletHub is very easy, and you’ll receive daily updates. Here’s how to do it:
- Sign up for a free WalletHub account.
- Log in to your account.
- Go to your dashboard by using the navigation menu in the top right corner of the page or clicking the WalletHub logo in the top left corner.
- View your credit score and click the “Recent Changes” button to see how and why your score has changed over time.
In addition to checking your credit score for free on WalletHub, you can also check your latest credit report for free.
Credit Management Tips
Credit management can be both confusing and practically difficult. It’s therefore a good idea to keep the following tips in mind as you start your credit career, particularly in light of the high stakes involved with your spending and payment habits.
Automate Payments
Forgetting to pay your bill on time is one of the easiest ways to damage your credit score. You can eliminate that concern by setting up automatic ACH payments from a checking account. Depending on your preferences, you can choose to automatically pay your full balance, the required minimum amount, or a custom amount that is somewhere in between.
Budget & Review
People have a tendency to overspend when paying for purchases with plastic, since the transactions are quick and done electronically, and there’s an extended time before you have to repay what you’ve spent. The only way to truly ensure that you’re spending within your means is to figure out how much you can afford to spend and then regularly review your spending and payment habits to verify that they are sustainable. So, make a budget and stick to it.
Use the Island Approach
The Island Approach is a credit card strategy that involves using separate accounts for different types of transactions. For instance, this might entail using one account for everyday purchases that you pay off in full within the billing period and another account for revolving debt. Doing so will enable you to get the best rewards on everyday expenses as well as the lowest financing rates. It will also reduce your interest costs and make it more obvious when you are overspending.
Check Your Credit Reports
Consumer credit reports are a wealth of information. Not only do they enable you to gauge financial improvement, but they also make it easier to spot potential instances of fraud as well as credit bureau mistakes that may be depressing your credit standing.
You should therefore take advantage of your free weekly credit reports from AnnualCreditReport.com and look over them for issues, then dispute any that you find. You can also check your TransUnion credit report for free on WalletHub, with daily updates.
Protect Your Account Information
Keeping your personal and financial information under wraps is necessary to minimize your chances of falling victim to identity theft and fraud. So, be careful about who you share your credit card information with, only submit payment information via secure websites, and shred sensitive documents before throwing them out.
Consider Other Ways to Build Credit
Credit cards are the best way, but not the only way, to build credit. You can also build credit by applying for loans, including the aptly named “credit-builder loans,” or other lines of credit. Becoming an authorized user on someone else’s credit card is also a good idea, and you might be able to build credit by having your rent or utility payments reported to the credit bureaus.
Compare Credit Card Offers
Direct product comparison is the only dependable way to make sure you find the best possible credit card for your needs. In other words, do your research – rather than simply applying for whichever card you see advertised on TV or you receive an offer for in the mail. You also shouldn’t let a credit card’s look and feel or organizational affiliation overly influence which offer you opt for. Focusing instead on the product terms that will prove most important to your day-to-day financial needs will pay off in the long run.
In addition, don’t make the mistake of only comparing cards on sites that have a limited number of cards or only show cards that pay them for advertisement. WalletHub can help you compare 1,500+ credit card offers, and we’ll show you the cards that will save you the most money. Some other sites might only track 100-250 cards, or fewer, and only highlight sponsored offers.
Don’t Pay Unnecessary Finance Charges
Leveraging debt only for specific reasons and with a well-thought-out repayment strategy in mind will help you minimize the interest that you incur.
Bottom Line
At the end of the day, being new to credit represents a great opportunity. You essentially have a clean slate in the eyes of the credit bureaus and creditors, which means you can exhibit responsible behavior from the get go. To start, build up your financial literacy and learn more about responsible money management, which you can do by reading articles on sites like WalletHub.
When you’re ready to apply for your first credit card, determine whether a student credit card, an unsecured credit card for limited credit or a secured card is best for your needs. Once you get a card, use it responsibly and you’ll be well on your way to saving a lot of time and money throughout your personal finance career.
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