How Black Americans can build and establish credit

Why is it important to establish good credit? Because better credit equals better financial opportunities – and, in many cases, better financial outcomes.

Unfortunately, not all Americans have easy access to the resources, tools and experiences that help people build and establish good credit.

“One of the big factors affecting Black Americans and credit scoring is how things are scored,” explains Felicia Gopaul, a certified financial planner (CFP) who has served as a CFP Board Ambassador and currently runs Financial Control Mastery. “Black Americans are 30 percent less likely to be homeowners, for example, but credit scoring does not include rent payments.”

Since mortgage payments benefit your credit score but rent payments do not, this puts a lot of Black Americans at a disadvantage. “I know a lot of people who pay their rent and utilities on time, but those payments are not factored into their credit,” says Gopaul. Although services like Experian Boost are working to fill this gap by helping people add their bill payment history to their credit reports, there’s still a lot of ground to cover – and a lot of history to overcome.

“Ultimately, many of the issues in our system affecting Black Americans boil down to a lack of multigenerational wealth and inadequate representation,” explains James Cooley, a financial counselor who works with the Financial Empowerment Centers to expand access to the credit system and create a more equitable society.

When you have a community of people who have been historically denied access to the types of financial opportunities that create wealth, and whose everyday financial activities – such as rent and bill payments – are not represented in our current credit scoring system, you end up with not only a racial wealth gap, but also a racial credit score gap.

Fortunately, there are ways to close both of these gaps – and one way to start is by building better credit.

How Black Americans can build better credit

If you want access to better financial opportunities, establishing a good FICO credit score is one way to get there. “Our credit system is far from perfect,” says Cooley, “but having above a 670 credit score has the potential to make life a bit easier and dreams more affordable to grasp.”

Danielle M. Burns, vice president and head of business development at CNote, agrees. “Black Americans have been left out of the credit-building conversation, which has led to a massive credit gap,” she explains. “If Black Americans understand the credit cycle and usage analysis, they can save on fees, high interest rates or other unfavorable terms.

“Being able to take those savings from potentially high interest rates and fees and then invest that money into a high-yield savings account and begin to contribute to an IRA or other investment strategy can help put them on a path to closing the racial wealth gap.”

Here’s how to get started.

Becoming an authorized user

If you’re having trouble opening a line of credit on your own – or if you’re still too young to open your first credit card – you might want to consider becoming an authorized user on a friend or family member’s credit card.

“I have a teenager getting ready to go off to college,” Gopaul says. “One of the things we talked about is her becoming an authorized user on our accounts. This gives her access to our credit, and she can leverage that. It’s a great way to start.”

When you become an authorized user on another person’s credit card, any activity on the card has the potential to become part of your credit history and improve your credit score. “It’s incredibly low-risk, high reward,” Cooley explains.

Unfortunately, the person who allows you onto their credit account takes on a slightly higher risk. Since they are legally responsible for all balances charged to the card, it’s important to make sure you don’t make any purchases that max out the credit card or create unwanted credit card debt.

“You have to be careful about who you add as an authorized user,” Gopaul advises, “so that they are not creating problems for you.”

Applying for a secured credit card

Another good way to build credit quickly is by applying for a secured credit card. With a secured card, you put down a small security deposit – often around $200 – and receive a small credit limit. This gives you the opportunity to practice using credit responsibly and build a positive credit history.

“I love secured cards,” says Gopaul. “You put a deposit down and are able to charge against it – and that’s a good thing.”

By making everyday purchases on your secured credit card and paying your statement balances on time, you’ll establish a history of good credit habits. At that point, your lender is likely to return your security deposit and graduate you to an unsecured credit card.

“A secured credit card that can help you build credit is often a good starting point,” says Burns. “Just make sure you pay off your balance every month!”

Taking out a starter credit card

In some cases, you may not need to become an authorized user or open a secured credit account to start building a credit history of your own. Many people with no credit history or limited credit experience are able to successfully open a starter credit card, especially if they already have a checking or savings account with a bank that issues starter lines of credit.

Starter credit cards generally have lower-than-average credit limits and may offer fewer rewards than today’s top credit cards – but a good starter card is a great way to start building credit. Cooley suggests looking for a starter card that doesn’t charge an annual fee and recommends building credit quickly by using the card to automatically pay small bills every month.

“It’s important to pay on time,” Cooley explains. “I have seen the best successes from clients who set the credit card to pay their Netflix and pay the card in full each statement cycle.”

Finding Black credit unions

Another good way to establish a positive credit history is by working with a credit union – especially if you can find a credit union designed to serve the Black community.

“They have something which is called credit builder accounts,” Gopaul explains. “You’ll typically find them in smaller community banks and credit unions.”

Credit builder accounts, sometimes called credit-building loans, work a bit like secured credit cards. “It’s the same sort of concept,” Gopaul says. “You put money down, and you can charge against it.”

If you decide to open a credit builder account with a credit union or community bank, ask whether your credit activity will be reported to the three national credit bureaus (Equifax, Experian and TransUnion). “If you can find one that reports to all three, that’s more helpful than one that reports to just one,” Gopaul explains.

Then, all you have to do is use your credit-building loan wisely.

By building a relationship with a community-based credit union, you may be able to access not only better credit options but also financial advice, in-person classes, community-building opportunities and more.

Accessing financial resources for Black Americans

One of the best ways to build a solid financial future is by setting yourself up with a good financial education. And one of the best ways to give back to your community is by sharing what you learn.

“If you can educate people, they will often take that information back into their communities to build it back,” says Gopaul. “That has been my experience.”

Free financial resources

If you want to access free financial resources, you have plenty of options. You can use a credit-building app like CreditWise from Capital One or Discover’s Credit Scorecard to track your credit score and learn how your everyday spending habits affect your credit. You can also look for organizations designed to teach financial management skills, including how to build a good credit score.

“Many groups out there – including local governments, through services like the Financial Empowerment Centers – provide no-cost financial counseling to get folks moving in the right direction and have a focused knowledge of the system,” Cooley explains. “Counselors can work with people on establishing and building credit, accessing safe financial products, creating a budget, paying down debt and increasing savings.”

Hiring a financial professional

As your credit and finances improve, you might want to consider hiring a financial professional. “I highly encourage everyone to consider working with a certified financial planner,” Burns says. “CFPs work in service of their clients to help them achieve their financial goals. They can help with everything from creating a personal budget, buying a house and saving for retirement to understanding how best to manage your credit based on your overall financial goals and objectives.”

Gopaul agrees. “Credit-building apps are beneficial,” she says. “But as you get more educated, sometimes these sorts of things do not help you move the lever.” By talking to a financial planner, you can get specific answers to personalized questions – like whether you can save money by improving your credit score before you buy a home. “The nice thing about CFPs is that we’ve been trained in a lot of different area,” Gopaul says.

Bottom line

“While the credit system is not perfect and has been discriminatory, it can be utilized to provide opportunities to individuals and communities that were even more limited by the old systems,” says Cooley.

Whether you’re hoping to buy a home, buy a car, rent an apartment or use a credit card to purchase your next vacation, having a good credit score will make these kinds of financial transactions easier and more affordable – and, if you have the right kind of credit card, more rewarding.

Understanding how the credit system works also gives you the opportunity to share what you learn with others, helping even more people in your community take advantage of the benefits that good credit can offer.