How to Start Building Credit

A credit file is a record maintained by nationwide credit reporting companies such as Equifax, Experian, and TransUnion. These companies collect information from lenders, landlords, utilities, debt collectors, and public records, and they compile it into consumer reports. The Fair Credit Reporting Act governs how credit reporting companies handle that information. Consumers can request free credit reports from AnnualCreditReport.com. A credit score is a numerical summary calculated from the information in a credit file by scoring models such as FICO and VantageScore. With no credit accounts or public records, a scoring model may not be able to generate a score. Starting to establish a credit history therefore means creating account history that lenders and other furnishers report to the credit reporting companies.

Common ways consumers first appear in the credit reporting system include being added as an authorized user on someone else's credit card, opening a secured credit card that requires a cash deposit, taking out a credit-builder loan that holds the borrowed amount in a savings account, or obtaining a co-signed loan. An authorized user may benefit from the primary account holder's history if the issuer reports authorized-user activity. A secured card issuer typically reports the account like a regular credit card. A credit-builder loan is structured so payments are reported to credit reporting companies. A co-signer agrees to be responsible for the debt if the primary borrower does not pay. These paths have different eligibility rules, costs, and risks.

Once an account is open, the lender usually reports the account's status each month to one or more nationwide credit reporting companies. Reported data can include the date opened, credit limit or original loan amount, current balance, minimum payment, payment history, and whether the account is current, delinquent, or closed. Payment history and amounts owed are among the most heavily weighted factors in many scoring models. Scoring models also consider length of credit history, new credit inquiries, and the mix of credit accounts. Applying for new credit can create a hard inquiry, which may be visible to lenders and can be considered by scoring models.

Because credit files depend on reported account activity, establishing a history generally takes time and cannot be completed instantly. Consumers can review their credit reports from each nationwide credit reporting company for accuracy and dispute incomplete or incorrect information under the Fair Credit Reporting Act. Reports can be requested at AnnualCreditReport.com. The Consumer Financial Protection Bureau and the Federal Trade Commission provide educational resources on credit reports, scores, and identity theft. No company can promise a specific score or outcome from any account.