What are the 4 steps of establishing credit?

What's the Best Way for a Young Person to Build Credit?

There are many ways to build credit, and they all involve creditors reporting your bill payment information to the major credit bureaus: Experian, Equifax and TransUnion. To begin establishing credit if you have none, try one or more of these options:

Become an Authorized User on a Parent's Credit Card

If one or both of your parents have a good credit history and keep their credit card balance low, you could ask them to add you to the account as an authorized user. As an authorized user, you may or may not have your own credit card for purchases, depending on your agreement with the primary cardholder, but assuming they continue to pay the bill on time and keep their balance low, your credit could benefit. Make sure the card issuer reports authorized-user activity to the credit bureaus, because not all do.

Open a Student or Secured Credit Card

College students can apply for a student credit card, which is often easier to get approved for than a non-student card. Whether or not you're in school, you could also consider getting a secured credit card. Secured cards require a security deposit, which typically becomes your credit limit. This makes secured credit cards easier to obtain than regular unsecured cards because the deposit limits the issuer's risk. Some card issuers will transition you to a regular unsecured credit card once you've shown responsible use of your secured card.

Pay Your Student Loans on Time

If you took out student loans to pay for college, your lender(s) will usually report your accounts and payments to the credit bureaus. Even if you defer making payments until after you leave school, student loans can help you establish credit—as long as you make your payments on time every month once you do start paying them back.

Take Out a Credit-Builder Loan

Some lenders offer loans geared to helping borrowers establish credit. With credit-builder loans, the bank sets aside the loan amount (usually $300 to $1,000), and you receive the money after you've made all the monthly payments. You'll generally have to pay interest on credit-builder loans from banks and credit unions, but some may return all or a portion of that interest once you pay off the loan. Mission Asset Fund offers a no-interest lending circle program, which could help you build an emergency fund and your credit at the same time. In either case, these loans will help you establish credit and show future creditors you are a responsible borrower.

Add Monthly Bills to your Experian Credit Report

If you're living on your own and responsible for your cellphone, utility, internet and streaming bills, you can add these accounts to your Experian credit report with Experian Boost®ø. Once they're in your report, your on-time payments may improve your credit history and increase your credit scores.

Create an Experian Credit Report With Experian Go™

If you don't have a credit report at all, the Experian Go program makes it possible for you to create your own Experian credit report. Simply sign up for a free Experian membership and answer a few questions about your financial habits. Experian Go will then help you choose an option like becoming an authorized user or signing up for Experian Boost to build your credit history.

Common Mistakes Young People Make When Building Credit

Building credit doesn't need to be difficult, but misconceptions can set you back and cost you money. Young people are often brand new to credit and may be particularly vulnerable to believing credit myths and making mistakes. Here are actions you should avoid:

• Missing payments. Even one late credit card or loan payment can negatively impact your credit. Setting up automatic payments could help you avoid accidentally missing a payment, but make sure you have the funds in your bank account to pay the bills. Also, if you fall far behind on payments—including utility, phone, medical and other payments—your account could be sent to collections, and the collection agency may report your collections account to the credit bureaus.
• Forgetting about closed accounts. Similarly, if you close an account that has a balance, such as a utility or cable account when you move, make sure to pay off the balance. Leaving the bill unpaid could result in the account getting sent to collections.
• Taking on too much credit card debt. Access to a credit card leads some young people to spend more than they can afford to pay off each month. Carrying a balance leads to interest charges, and having a high balance can hurt your credit scores. It's best to treat your credit card as a debit card and only use it for purchases that you can afford to pay off.
• Not paying off credit card balances. You don't need to maintain a credit card balance to build credit. On the contrary, it's best to pay your bill in full each month to avoid interest charges. Also, paying off your credit card bill each month keeps your credit utilization ratio low. Your utilization ratio, or rate, is the amount of credit you're using compared with how much you have available, and it's an important factor in your credit score. Experts recommend keeping your utilization ratio under 30%. So if you have a card with a credit limit of $1,500, always keep your balance under $500, and pay off your balance when you pay your bill each month.
• Submitting back-to-back loan applications. When a lender requests your credit report from one of the credit bureaus to make a lending decision, it's called a hard inquiry, and it could lower your credit scores. Multiple hard inquiries can increase the negative impact, so be cautious about submitting one application after another. This is a red flag to creditors, who may see your many applications as a sign of financial distress. This translates into risk, which most lenders try to avoid.

There is one exception, however: Most credit scoring models don't ding your score when you're shopping for one type of loan, such as an auto loan, because looking for good terms and the best interest rate is considered good practice. For example, with FICO® Scores☉ , multiple auto loan, student loan or mortgage hard inquiries only count as a single inquiry for scoring purposes when the inquiries occur within a 14- to 45-day window (depending on the type of FICO® Score).

How Long Does It Take to Establish Credit?

Your credit file is established as soon as your first account gets reported to the credit bureaus. However, building good and useful credit can take some time. For example, FICO can't score a credit report that doesn't have an account that's at least six months old. In addition, if you have fewer than five credit accounts, also known as having a thin file, lenders may not be able to assess your creditworthiness.

Because the age of your accounts is a credit scoring factor, the longer you've had open and active accounts, the better (assuming you've been making on-time payments). While this takes time, you're making a long-term investment in your financial future and establishing credit while you're young—which is better than waiting until you need to apply for a rental apartment or loan.