View all Personal Finance articles

How to Start Building Your Credit for Free

Building your credit for the first time can often require an upfront fee or interest. But not with these options.

Photo by Milan Chudobaon Pexels

Whether it's an annual fee, loan origination fee or interest you can't avoid, many of the options for building credit require some sort of payment. This can make establishing your credit file and improving your FICO® Score challenging. However, if you know where to look, you'll find there are a few free ways to get started.

Become an Authorized User on a Credit Card

Rather than applying for a credit card on your own, you may be able to establish and build your credit by having someone, like a close friend or family member, add you as an authorized user on one of their cards.

It's often a free option, and the credit card company will send you an authorized user card that's linked to the primary cardholder's account. But double-check with the card company first, because policies can vary and some card issuers might not report the account to the credit bureau under your name.

Before your friend or family member adds you as an authorized user, you may also want to be sure they responsibly manage their account. While you'll receive an authorized user card, the primary cardholder remains in charge of making the payments.

A card that's always paid on time and has a low balance relative to its credit limit could help your credit. But if they regularly have a high balance, that could result in a high utilization rate that could actually hurt your FICO® Score as well.

Use an Interest-Free Lending Circle

An option that puts you more in control is to look for a credit-builder loan that doesn't have origination, administration or service fees, and doesn't charge you interest. Some nonprofits create and manage these to help people establish and build their credit.

One of the most common forms is a lending circle. Generally, six to 12 people are put together in a group, and each member contributes an equal amount — such as $50 to $200 each month — to the circle's pool. One member receives the entire pool amount, and the recipient changes until every member has a chance to receive the fund.

Lending circles have historically been informal community-driven savings programs. By creating an organized structure and formal loan documents, the nonprofits that run the circles can report the monthly payments to the credit bureaus.

One potential downside is you won't know where you'll be in the order until after your lending circle is formed. While it might not cost you any money in the end, you could have to make the monthly payments for a while before it's your turn to get the pool.

Open a Flexible Secured Credit Card

Traditionally, a secured card requires you to send the card issuer a minimum refundable security deposit amount — $200 is common — which will determine your account's credit limit. While you can get the money back, it could be inconvenient and expensive in the interim. Plus, some secured cards have annual fees and high interest rates.

Several newer banks are offering secured credit cards that may be easier and cheaper to manage. They often don't have annual fees or minimum security deposit amounts. And while you'll still need to set aside a refundable security deposit, these banks let you closely manage the security deposit savings account.

For instance, you can quickly move money into the account when you want to use your card. Or, if you change your mind, you can take the funds out without having to close your secured credit card.

Add Rent, Utility, or Other Monthly Bills to Your Credit Reports

Another option is to look for programs that let you add "alternative data" to your credit reports, such as payments for your monthly utility, telecom, rent or other bills.

However, many of the free programs only report to one or two of the three major credit bureaus, and the programs that report to all three may have a one-time fee or monthly subscription. The rent reporting programs also may require your landlord to sign up first. And, some can only add information to a credit file that's been created — meaning you can't use them to start building credit for the first time.

Still, it's worth asking your landlord and looking into options if you want to build credit without getting a credit card or loan.

Once you've started, learn more about how your FICO® Score is calculated and what you can do to get an excellent score.

Louis DeNicola

Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.