How to Build Credit When You Don't Have Any

It can be difficult to establish a strong credit record, but a few small steps can put you on the right track

An illustration of a credit card underground with plant sprouts growing out of it. Illustration: Consumer Reports, iStock

If you’re a young person just starting out or someone seeking to get ahead financially, building a strong credit history may seem daunting.

On the one hand, you need to establish a track record of regular payments on credit cards and loans. But if you don’t have a credit history, how can you even qualify for a credit card or loan in the first place?

That’s why millions of Americans lack credit histories or are stuck in subprime credit territory, which carries higher-than-usual interest rates.

According to research by the the Consumer Financial Protection Bureau (CFPB), 11 percent of the adult population in the U.S., or 26 million people, don’t have a file at the major credit bureaus, and 8.3 percent, or 19 million, have too little credit history on file to generate a credit score. 

Young Americans and people of color, who tend to have lower incomes, are more likely to fall in this “credit invisible” category, the CFPB found.

“The difficulty of building credit means many people end up struggling financially,” says Chi Chi Wu, a staff attorney at the National Consumer Law Center (NCLC), a nonprofit group.

But there are strategies that can help you start building credit and improve your credit scores.

You’ll need to set up a checking account, which some banks allow with as little as $25 to start. (For more on low-cost banking, see “How to Choose a Bank Account Without Overdraft Fees.”) When you set up your account, be sure to keep up your bill payments. Using auto pay and account alerts can help. 

Once you’ve got that banking track record, there are five options to consider:

Apply for a Secured Credit Card

A secured credit card is a classic starter option for those with little or no credit history. It’s generally easy to qualify for one. You’re required to put down a deposit—perhaps $250 to $500—which becomes your credit limit.  

More on Banking and Credit

A good place to start is the bank or credit union where you have your checking account. For those who need more guidance, you can get free one-on-one help from a financial counselor who works with lower-income consumers. You can find one through the Financial Empowerment Center, a national nonprofit initiative. 

If you pay your balance on time consistently for six to eight months, or perhaps a year, the card issuer will refund your deposit and offer an unsecured card with a higher credit limit. Many have no annual fees, and some offer cash-back rewards.

“A secured credit card, if you pay it regularly, is the lowest-risk credit building option for most consumers,” says Syed Ejaz, a financial policy advocate at Consumer Reports.

Using a secured card strategy worked for Juan Morales, 52, who lives in Jersey City, N.J. Because he had a thin credit history, his credit score was stuck in the 550s, or subprime territory. But in 2018 he began working with a financial counselor, who recommended that he get a secured credit card.

Morales followed that advice and got a secured credit card from his bank. After six months of payments, he was upgraded to an unsecured card with a higher credit limit. Since then, he’s been careful to keep up his payments, and over the past couple of years his credit score has risen to 670, which places him in the prime range.

“It took time, but I’m coming back,” Morales says.

Get Added to Another Cardholder's Account

If you have a relative or friend who is willing to help you build credit, you can ask them to add you as a co-signer to their credit card account, says Jill Gonzalez, senior analyst at the consumer finance website WalletHub

Co-signing allows two people to be on one credit card account, which means both of you will share the credit history. You will both have to make timely payments and keep the balances paid off. That means a late payment will ding the credit histories of both accounts. But both of you will benefit as timely payments improve your credit scores, which makes this is a popular option for parents who seek to help their children build credit.

You can also be added as an authorized user on another established credit user’s account.  The cardholder remains the one responsible for the card payments, however, so there will be less impact on the young person’s credit score. But it does help fill out a thin credit history.

Opt for an Alternative-Data Credit Card

Another strategy for those with little credit history is to apply for one of a new breed of credit card that doesn’t require you to have a credit score, such as Petal or TomoCredit. 

But these card issuers require read-only access to your bank checking account to analyze your spending patterns, bill paying, and income to determine if you’re eligible. 

You will generally need at least six months of banking history, says Kristy Kim, co-founder and CEO of TomoCredit, which launched in 2020. It also weighs your income, account balances, and other factors.

Petal, which launched in 2018, sticks mainly to banking data, including regular income and bill payments, to create a cash score as a measure of overall financial responsibility,

Before you apply, make sure you understand the terms of these cards, including fees (Petal and TomoCredit don’t charge annual fees), interest rates, and rewards. 

Generally speaking, alternative-data cards start you with a low credit limit, from a few hundred dollars to $1,000 or more, though the limits are raised over time. TomoCredit requires new cardholders to make weekly payments by autopay, so you can’t carry a balance. After about three months, your payment period moves to once a month, and cardholders can eventually qualify for limits of $10,000.

Both of these card issuers report your payments to the three major credit bureaus, Experian, Equifax, and TransUnion. 

While alternative-data cards may be good starter options for someone with little or no credit history, be aware that you will be giving up your banking data, which could raise privacy concerns, says Wu of the NCLC. (Both Petal and TomoCredit say they don’t share consumer data with third parties without consent.)

Consider a Credit-Builder Loan

If you can afford to make regular payments for a few months or a year, a credit-builder loan might work for you, Gonzalez says. These are short-term loans, typically for $250 to $2,000, that are designed to help people with limited credit histories build credit.

You can apply for one of these loans at many banks, credit unions, and online financial services companies. The process is similar to getting a personal loan, but credit-builder loans operate more like forced savings programs. The bank sets aside the amount you borrow in a savings account or CD, and you don’t get access to that money until you make monthly payments over the period of loan, typically six months to two years. 

Those payments include interest, but the rates tend to be lower than credit card rates, typically 6 percent to 16 percent, and you are likely to be charged a fee, perhaps $25 to $50. It’s essential to shop around because costs vary widely, says Mike Schenk, chief economist at the Credit Union National Association. 

Your loan payments will be reported to all three major credit bureaus, helping you build your credit history. Research by the CFPB found that this strategy was most effective for borrowers without existing debt, who increased their chances of having a credit score by 24 percent.

Apply for a Store Credit Card

Another option for boosting your credit record is to apply for a store credit card. These cards are often easier to get than regular credit cards, though you generally need some credit history.

There are two main categories of store cards. One type can only be used with a particular retailer, such as Gap or Macy’s. It may also work for the retailer’s partner brands. The other type is a Visa, Mastercard, or American Express card that carries the brand’s name but can be used anywhere that’s linked to that payment network.

Be aware that store cards often have higher interest rates than standard cards, says Ted Rossman, senior industry analyst at Recently, the average rate for retail cards was 24.35 percent vs. 19.92 percent for regular cards.

Whatever option you choose, you’ll need to be patient, because boosting your credit score can take many months.

Photo of CR Money editor, Penny Wang.

Penelope Wang

I cover everything from retirement planning to taxes to college saving. My goal is to help people improve their finances, so they have less stress and more freedom. What I enjoy: walks through the city, time with family, and reading mysteries, though I rarely guess who did it. Follow me on Twitter (@PennyWriter).