Constructxion site with credit score wheel
Jared Oriel for Money

You might think the only thing worse than having bad credit is having no credit history at all. After all, it can be hard to get a car loan or a credit card if lenders have no way to evaluate if you’re likely to make on-time payments.

Having a credit report with little information in it — what’s termed a “thin file” in credit score-industry lingo — can be daunting. This is often the case with teenagers or recent arrivals to the U.S. Not being able to open a postpaid cell phone account or having to get a co-signer if you want to buy a car or lease an apartment can be a headache, and not having any credit in your own name limits your ability to attain financial freedom.

But the good news is that, unlike most negative credit activity, which stays in your credit file for seven years, you can start building credit much more quickly. Dara Duguay, CEO of the Credit Builders Alliance, says as little as six months’ of on-time payments on a credit account can generate a credit score. You might not have good credit right off the bat, but you can work your way up to it.

“On average, Credit Builders Alliance has found among our lender members that the FICO is around 650. Depending on the unsecured credit card provider, they may be able to get a credit card in the mid 600s,” she says.

A credit score is the three-digit number that distills your personal finance activities into a ranking that helps a credit card company or a financial institution determine if they should extend you credit, and what interest rate you’ll pay.

“You need active lines of credit,” says Galen Gondolfi, spokesman for Justine Petersen, a St. Louis-based financial education and assistance nonprofit. “If you have no active lines, your credit score isn’t going to grow.”

There are three major credit bureaus: Experian, TransUnion and Equifax. These companies compile your credit report, a collection of data points about your financial habits that are essentially the building blocks of your credit score. The most commonly-used credit scoring model is a FICO score, which ranks your creditworthiness on a scale of 300 to 850. VantageScore is another scoring model that was developed by the credit bureaus; it has the same numeric range, although its formula for assessing creditworthiness and risk is a bit different.

Although the criteria vary by lender and borrowers’ individual circumstances, a score of 800 higher is generally considered excellent, while anything between 580 and 669 is considered fair, and anything below 580 is considered poor.

FICO uses five different categories of information to calculate your credit score: Payment history; amounts owed as a percentage of your available credit, also called your credit utilization ratio; length of credit history; the types of credit you have open, and how much of your credit is new credit.

How a credit-builder loan ban help build credit

A credit builder loan is a tool that can help you establish credit even if your credit history is skimpy, says Jeff Richardson, spokesman for Stamford, Conn.-based VantageScore Solutions.

“A credit builder loan is typically available through credit unions,” he says. “You basically open up a debt obligation and pay it back, and that’s reported to credit bureaus,” he says.

A credit-builder loan is an installment loan, meaning it has a set time frame, fixed interest rate and monthly payments. Unlike conventional personal loans, you don’t get access to the money when you take the loan out, but the advantage, especially for people who don’t have much extra money, is that you don’t have to pay upfront as you would with a secured credit card.

“The borrower pays a set amount each month, and at the end of the loan period, the money is released to the borrower,” Duguay says. (The money accrues in a savings account in the meantime.)

If you successfully complete a credit-builder loan’s repayment plan, though, you will then have access to the money you have been putting the loan payments towards, which you can then leverage into a secured credit card.

Although if you have the means, you don’t have to take your credit-building initiative one step at a time. “Having a diversity of types of credit helps strengthen a credit score,” Duguay says. In other words, having a secured credit card — which is revolving credit — along with a credit-builder loan — which is an installment loan — makes you more creditworthy in the eyes of lenders. (You also don’t necessarily need a credit-builder loan to get an installment loan on your credit file. If you have student loans, those are installment loans, too, and making consistent on-time payments towards those also adds to your positive credit activity. Auto loans are another common example of installment loans.)

How a secured credit card can help build credit

“Secured credit cards are almost denied to no one,” Gandolfi says, with the possible exception of people who are within a year of a bankruptcy filing. Unlike a credit builder loan, you get access to credit immediately with a secured credit card, but the drawback for some is that you have to come up with the money for a deposit that can cost anywhere between $50 and $200 at the outset. Visa, Mastercard and Discover all offer secured credit cards.

With a secured credit card account, your credit limit is equal to a deposit you put down, and you are responsible for keeping your spending within that limit and making on-time monthly payments. The card issuer reports those payments to the credit bureaus, and some of the better secured cards include a built-in “on ramp” to transition you to an unsecured credit card after a set period of time, provided you don’t make any late payments.

Although the quality of secured credit cards has improved in recent years, there are still some offerings that charge high annual fees and don’t report your activity to the credit bureaus (which is the entire point). Read the credit card issuer’s disclaimers and fine print and make sure you’re aware of any annual fees — which come out of your deposit and reduce your available credit — before signing up.

If you have some credit history but not a lot, you can also try getting a retail credit card as your first credit card. Store cards generally have lower credit limits and higher interest rates, but they’re also more readily available to borrowers with lower credit scores. (Just watch that interest and late-payment penalties, both of which can be steep.)

How becoming an authorized user can help build credit

If someone with established good credit adds your name onto a credit card account as an authorized user, this can help boost your credit. This is often how many college students begin building credit, if a parent adds them to a credit card for them to use while in college, for example. Becoming an authorized user isn’t the same as having a co-signer or a joint account, because the primary cardholder retains the right to remove you from the card.

While most of the other credit-building steps you can take on your own and outlined here can’t make your own credit history any longer, a big benefit of being added as an authorized user is that the primary cardholder almost certainly has a longer credit history, and the length of your credit history is one component of a credit score.

It also should be in addition to other credit building initiatives, not as a substitute for them, Gondofi says. “It’s a tool, but what’s more important are lines of credit in your name,” he says.

The big caveat to getting onto an account as an authorized user is you have to have a family member or someone else with a good credit history who’s willing to add you. It’s a serious question of trust: If an authorized user runs up a bunch of charges, the primary cardholder will be stuck paying them. Conversely, if that person falls behind on their payments or maxes out the card, the credit score of the authorized user could be hurt instead of helped.

How using alternative data can help build credit

In their quest to expand credit access, the credit-reporting industry has turned towards other kinds of financial activity that isn’t typically included in traditional credit scoring models but can still be useful for evaluating a would-be borrower’s level of financial diligence.

If it’s your first time trying to obtain credit, Experian Boost or UltraFICO are two fairly new tools that incorporate different kinds of activity. Experian Boost, a free service Experian launched in 2019, can capture positive payment activity like cell phone, utility and rent payments into your record. These payments aren’t included in typical credit scoring calculations but are another way for a prospective lender to assess your creditworthiness. On average, Experian says users see a 13-point increase in their credit scores. Also launched in 2019, UltraFICO includes bank account activity from a user’s checking account to give lenders a more in-depth look at borrowers with a “thin file.”

“These types of tools are very helpful since they include data sources that are usually not found on a traditional credit card,” Duguay says. “This is data that is normally not included on a traditional credit report.”