What’s the Best Way to Establish Credit?


I did something last week that I thoroughly enjoyed.  I spoke to the entire boy’s senior class at The Westminster Schools in Atlanta.  It was the 5th straight year the school was kind enough to invite me to speak with their seniors.  This week I’ll speak to the entire girl’s senior class.  The topic, as you probably have already guessed, is how to not screw up your credit while you’re in college.

I have to admit the first year I agreed to speak at the school I did so on one condition.  They had to let me eat in the cafeteria.  I was SO hoping for the ubiquitous rectangular shaped pizza, and I was not disappointed.

Keep in mind these young adults are all 17 and 18 and all of them are headed to college campuses in the fall.  And up until last August they would have been lambs to the slaughter…credit card style.  The card issuers would have been on campus trading t-shirts and coffee mugs for credit applications.  No more.   The CARD Act has largely put an end to marketing on college campuses.

So the question many of the kids had, now that a credit card isn’t so easy to obtain…how am I going to establish credit?  This is the million dollar question.  We all have one chance to establish credit for the first time.  After that we’re left to re-establish or re-build our credit, but we can’t ever establish it again for the first time.

The best way for the kids, and anyone else for that matter, to establish credit is to choose one of these two options…complete with pros and cons of each.

Secured Credit Card – A secured card is a real credit card.  It’s issued by a bank.  It has a Visa or MasterCard logo.  And, it can be used just like any other credit card.  The one huge difference is the fact that the credit limit on that card is determined by an amount of money YOU deposit with the bank.  So, if you deposit $1,000 then the bank will give you a $1,000 credit limit.

If you screw up and don’t pay your bill then they’ll simply take it out of your deposit.  Secured cards are not a great long term credit product but they do serve a purpose.  They’re great for rebuilding poor credit and they’re great for establishing it for the first time.

There are a variety of web sites where you can shop around for the best secured credit card.  They all have fees and the rates aren’t the best in the market but that’s ok.  The sole purpose for the card is to get a good account on your credit reports with the long term goal of improving your credit reports and credit scores to the point where you’re offered unsecured cards with much higher credit limits.

Authorized User – This is how I established credit.  My parents added me to one of their credit cards as an authorized user.  An authorized user is simply an additional cardholder who does not have liability for the payments on the account.  They get a card in their name, have full charging privileges, and usually the account shows up on their credit reports.  If the account is in good standing, has never been paid late, and the balance isn’t too close to the credit limit it will help to establish a pretty darn good credit score for the authorized user.  And, if the parent misses payments or maxes out the card the authorized user can simply hop off the card by having their name removed from it.  The account comes off the credit report and…no harm no foul.  It’s like having a credit card with training wheels.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.


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  • Alan
    February 7, 2011

    I am an authorized user on two of my parents’ credit cards. This really helped me build my credit score, and especially my credit history, since they are my oldest accounts. I recently took a look at my credit report, and it listed the fact that I was an authorized user on one of the accounts, but not the other (US Bank). I called them, and they told me that I would need to become a joint owner of the account, making me responsible for the charges and payments. I did not have a problem with this, so I continued with process. Is there a reason that they strayed from the industry standards, and is this in compliance with the various credit regulations in place today?

  • john
    February 8, 2011

    I would have advised against changing to a joint cardholder. You now have equal liability for payments and equal risk for any nonpayment. Also, if the card gets maxed out you can’t simply have it removed from your credit reports like you could have as an authorized user. There’s no incremental value to being a joint holder for your scores.

    They didn’t violate any credit reporting regulations. They would rather have more people liable for payment, which is probably why they did what they did

  • Alan
    February 19, 2011

    Thanks for the reply John! I understand the disadvantages of having joint liability on the card, but I feel that it would have a positive effect on my credit score and my young credit history. The account is in good standing, has a high limit, and has never had a late payment, so I am fairly confident that it will not negatively impact my credit in the future.

    If, by some unforeseen circumstance, the account does become delinquent in some way, is it is possible to be removed as a joint owner with the permission of the other owner?

  • John Murcia
    August 7, 2011

    Hello, John.. I have a guestion ? If u be so kind to answer it.! I have had a credit card..(creditone bank) for about 4 years..sence I had no credit. They where the fist to offer me a credit line. Which, yes.. I have to admit.! They did help me raise my credit score in the past 4 years.!! No late payments always under 50%.. The only thing is.. At this point.. I have relized the. A.P.R does not go down at all. I also called them.. & asked to lower my. A.P.R. They said, at creditone bank.. They never lower interest rate for nobody.!! So there for, I feel mybe I should pay my balance off.. & cancelle this credit line whith creditone bank.!! My question is? If I Cancelle this credit card.. Will it effect my score..??? Or is it better to let it.. Expire.! Vs cancelle.

  • August 9, 2011

    Hi John – If you’ve earned better scores then you should be able to open a new card somewhere else with a better APR and transfer your balance. The average APR is between 14-15% so keep that in mind. Try a credit union first if you are a member of one.

  • Mandie
    November 15, 2011

    Hi John, I see your last post was August 9th so I’m hoping to still be able to receive a reply. I’m 25 and still haven’t established my credit. After reading your original story I was wondering if as an authorized user do you have to access or use the account for it to affect your score? Meaning, if I were to convince my grandmother or parents to add me as an authorized user without me actually ever USING the account or card or anything, would it still work the same?

    This question seems pretty silly but I know that there are so many hidden rules and regs when it comes to this stuff. I’m divorced and my husband wrote a bad check with our credit union account and I have a judgement against me for it that’s still unpaid, I think that’s the reason my current bank (BofA) denied me a SECURED line of credit. :-/ That was hurtful and surprising, but I understand.

  • November 16, 2011

    If you’re listed as an auth user on a credit card (and the issuer reports it to your credit reports) then it will count in your scores. Using the card isn’t necessary. Have them add you to a card that is old, always paid on time, and has a pretty high credit limit. That’s the best combination. And as soon as possible, get a card in YOUR name so you don’t have to depend on someone else in order to build credit.

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