How to Build Credit From Scratch

Jessica Sain-Baird, Editor at LendingTree

Xiomara Martinez-White, Editor at LendingTree

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It sounds like a riddle: How to build credit if you need credit to get credit? But it’s not as puzzling as it seems.

There are a number of tools that can help, including credit cards and credit builder loans, and by reporting payments for common essentials like rent, utilities and other bills. Everyone has to start somewhere, and we’re here to show you how to build credit from scratch wisely with these and other options.

Why it’s important to build credit

Is building credit really that important? Well, not if you don’t ever want to buy a house or a car. Or if you don’t ever want to rent an apartment, get a cellphone plan or get a job. All these things become more difficult — if not impossible — if you haven’t established credit. So, for most people, the answer is a resounding yes, credit is that important.

When it comes to big purchases (think a car or a home), unless you have loads of cash to pay out of pocket, you’re going to need a type of loan. Not only does your credit affect your ability to get a loan, but it also affects the terms of your loan, like the interest rate you’re given. In addition, landlords and employers often check applicants’ credit history to see how reliable they may be, and utility companies may do so before hooking up services to your home.

When you have no credit history, you’re classified as “credit invisible,” and it’s up to you to build a credit score. And while neither is ideal, most experts say that being credit invisible leaves you only in a slightly better position than if you have bad credit.

Speaking of bad credit: As you start establishing credit, you’ll begin moving the needle on your credit score, which can open access to bigger loans, better mortgage rates and even better cellphone plans — if that needle moves in the right direction. Delinquent payments and defaulting on loans can drag your score down to a level that can be difficult to recover from.

How to build credit from scratch

There’s no such thing as a starting credit score — in the beginning, you just won’t have a score at all. If you’re ready to start building your credit from scratch, here are some simple ways to go about doing so.

Open and use a credit card

Most people’s first foray into credit is opening a credit card, and there are specific credit cards that are best for building credit. You likely won’t have a huge credit line out of the gate, but starting to use your card regularly and responsibly is a great way to start building a strong credit score.

Of course, “responsibly” is the key word. When it comes to credit scores, most lenders use the FICO Score, which is calculated based on five different areas: payment history, amount owed, length of credit history, new credit and credit mix. The biggest factor in this mix is your payment history, which means you’ll need do everything you can to pay your bills on time, every time.

Secured credit cards

Lenders are more willing to issue secured cards to those with no credit history, as they require a security deposit. The amount of the deposit is typically equal to your credit limit — for example, if you put down a $300 deposit, your credit limit would be $300. It’s low-risk for the lender, but it allows you to demonstrate responsible habits and build credit.

You’ll generally get your deposit back if you pay off the balance and close the card. In some cases, you may even get upgraded to an unsecured card with the same lender after demonstrating responsible habits.

College credit cards

Getting a credit card while you’re a college student may be easier, as some banks, credit unions and other issues have credit cards specifically designed for college students. These cards usually have credit limits on the lower side, but they’re worth considering if you’re eligible and able to keep up with your studies and your payments.

Become an authorized user

If you have a close relationship and mutual trust with someone (hello, parents!), you can ask to become an authorized user on one of their accounts to help your credit. Once you’re added, the monthly behavior on that account (i.e. payments made or not made) will be reported on your credit report as well as theirs.

While it’s up to you and the original cardholder to work out how payments will be made and divided up, as long as they’re made on time consistently, you can quickly build good credit. Of course, on the flip side, missed payments can hurt your credit score as well as theirs — and likely damage your relationship with the original account holder, too.

Report bill payments

If you’ve been making regular payments for things like rent, utilities or a cellphone plan, you may be able to get credit for them. These types of payments aren’t typically included in reports to the three major credit bureaus, but as long as you’re making them on time, you may be able to use them to boost your credit score. Credit where credit is due, right?

Third-party services can help get your bills like rent payments factored into your score. For example, Experian Boost will link your accounts so that on-time payments for utility, phone and streaming services are reported, while Experian RentBureau will make sure you get credit for rent payments.

Consider a credit builder loan

As their name implies, credit builder loans are designed specifically to help people build credit. Typically offered by smaller banks and credit unions, they’re similar to secured credit cards in that you have to put down money upfront in order to receive any of the funds.

Say you take out a $500 loan. You won’t receive $500 to spend, but rather you’d make regular payments on that amount — principal and sometimes interest — which are kept in a locked account. Once you’ve paid the full amount, you receive the funds.

The loans are typically on the smaller side — less than $1,000 — and you may have to pay a fee in addition to your deposit. However, your deposit may also accrue interest, which can offset the fee. The biggest benefit to these loans, however, is that your (hopefully on-time) payments will be reported to the credit bureaus, and you’ll begin to build your credit score.

Use a cosigner for credit

To improve your chances of being approved for a credit card or loan, you may want to consider getting a cosigner with a good credit score. This person essentially vouches for you with their good credit history and agrees to pay off the loan if you’re unable to do so.

Since the cosigner is on the hook for the debt, you want to make sure you don’t spend beyond your means and fulfill your obligations. If you don’t, you risk damaging your credit, their credit and your relationship with them.

Review our list of the best personal loans with a cosigner.

How to improve your credit score

As you move out of the cloak of credit invisibility, you want to build credit that’s seen in the best light — that means building a strong credit score. Here are some guidelines to help boost yours:

Make regular payments. Your payment history is the biggest factor that influences your credit score.
Use some of your credit, but not too much. Your credit utilization ratio (how much of your credit limit you’re using) is another big factor considered when calculating your credit score, and one that’s too high can drag down your score. A good maximum, according to experts, is up to 30%, though 10% or lower is considered ideal.
Don’t take out too many loans too quickly. Don’t go gung-ho with your approach to building credit and take out every loan you can. Part of your score is based on the length of your credit history — however, your credit score goes down every time you apply for a new loan, as doing so brings down the average age of all your accounts.
Dispute possible credit report errors. Make sure you review your credit report regularly — you can get them free from each of the three major credit reporting companies once a year at AnnualCreditReport.com. Report any credit report errors immediately.

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