How to establish credit

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Most financial milestones, from getting a credit card to buying a house, depend on your credit score. That three-digit number is determined by a consumer credit-scoring model from FICO or VantageScore evaluating information gathered by credit bureaus like Experian, Equifax and TransUnion.

If you have no credit history or a thin credit file, you might not have enough information to generate a credit score.

Most U.S. consumers begin building a credit history at 18, when they can open their first credit card or bank account or take out student loans in their own name. It can take up to six months of activity to establish a score, so if you're young, you may not have one yet.  

Other reasons you might not have a credit history include:

• You have no credit activity: You've never opened a credit card or taken out a loan in your name. Having too few accounts, a very short history, or only being an authorized user on someone else's accounts may not create an adequate credit history either.
  
• Your accounts are inactive: If you've left credit cards or other accounts untouched for more than six months, there might not be enough payment history to review.
  
• Being a recent Immigrant: Even if you have a full credit history in another country, it typically does not transfer to the U.S. credit system.

If you fall into any of these categories or don't have a credit history for another reason, you can work on establishing one.

Secured credit cards are typically easier to qualify for because you provide a security deposit, which works as collateral and typically doubles as your credit limit. If you have a $300 deposit, you have a $300 limit.

Just like an unsecured card, you can incur interest and late fees. Some secured cards even offer rewards and bonuses. The OpenSky Secured Visa allows users to earn up to 10% cash back on everyday purchases.

The U.S. Bank Cash+® Visa® card comes with 5% cash back on the first $2,000 in combined eligible purchases in two categories each quarter and 5% cash back on prepaid air, hotel and car reservations booked in the Rewards Travel Center. You also receive 2% cash back on eligible purchases in your choice of one everyday category and 1% cash back on all other eligible purchases.

After a period of on-time payments with a secured card, your card issuer may review your account and raise your credit limit or transfer you to an unsecured card and return your deposit.

• Read more: The best secured credit cards

One way to build credit is to become an authorized user on someone else's credit card. It helps establish your credit history and can even earn the primary cardholder additional rewards.

If you fail to make payments, however, they're held liable. So make sure you both understand the responsibility and have a clear plan for paying for any purchases.

While you have to be 18 to open a credit card account, there's no age requirement to be an authorized user.

Some card issuers charge more than $75 a year for an authorized user, but the Blue Cash Preferred® Card from American Express doesn't require any fee (see rates and fees). Blue Cash Preferred offers 6% cash back at U.S. supermarkets (up to $6,000 per year in eligible purchases, then 1%). You also get 3% in purchases at eligible gas stations and rideshare services and 1% back on other eligible purchases.

Your payment history represents 35% of your FICO Score. If you have thin (or no) credit history, a credit-builder loan can demonstrate that you can make consistent, on-time payments. 

Instead of the borrower receiving the money and then making regular payments, the lender deposits the loan (usually $1,000 or less) into a savings account or CD. You then make regular payments (including interest) and the money is released to you once you've paid the loan in full.

Self offers a variety of credit builder loans with monthly payments ranging from $25 to $150. Your payment history is reported to all three credit bureaus, helping to quickly establish your credit history.

If you want to build credit without a credit card, you can get on-time payments to utilities, cell phone carriers, streaming service and other companies linked to your Experian credit report with *Experian Boost®.

When you sign up for this free service, you'll also get an updated FICO® score and a copy of your Experian credit report.

There are also paid plans from other companies that add more features. With Ecredable, you can add on-time rental payments and UltraFICO™ lets you add bank account information, which is helpful if you have a thin credit file but healthy savings.

Once you start building a credit history, the next step is to ensure it contains positive items that will help you earn a good credit score. There are many variables, but some universal tips include:

1. Use the credit you have

Remember, to establish a healthy credit history and a good credit score, you need to tap into at least some of the credit you have available.

You don't need to rack up thousands in debt, however. Credit bureaus look favorably at on-time and early payments, even for relatively small amounts.

2. Pay your bills on time

Payment history accounts for 35% of your credit score, so paying on time and in full every time is the best and fastest way to earn stellar credit. That goes for everything from secured credit cards or credit builder loans to mortgage payments and car loans.

3. Keep your credit utilization low

Your credit utilization rate is the amount of credit you're using compared to your overall credit limit. For example, if the total available credit on all your credit cards is $10,000 and your card balances come to $2,000, your credit utilization rate is 20%.

Experts recommend keeping your credit utilization rate below 30%, and consumers with excellent credit scores typically keep it below 10%.

If you want to lower your ratio, you can request a credit increase from your card issuer. Just remember to leave the additional limit untouched.

Most banks and credit card companies offer their members a free credit report at least once a year. Your report doesn't include your credit score, but it will give you a good overview of your financial picture (and point out any errors).

You can get your FICO score from Experian or by signing up with MyFICO.

Some card issuers, including American Express and Capital One, make VantageScore credit scores from TransUnion available, even if you don't have an account.

If you want regular updates on all three reports, you'll have to subscribe to a paid credit monitoring service or identity theft protection service. Experian IdentityWorks offers credit monitoring, dark web surveillance, Social Security number alerts and identity theft insurance.

PrivacyGuard's top plan combines the best of credit monitoring and identity theft protection, including daily three-bureau monitoring, monthly credit score tracking, dark web scanning and identity theft insurance.

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For rates and fees of the Blue Cash Preferred® Card from American Express, click here.

*Results will vary. Not all payments are boost-eligible. Some users may not receive an improved score or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.