How to build credit from scratch

Young woman wondering how to build credit from scratchImage: Young woman wondering how to build credit from scratch

In a Nutshell

To start building credit, you’ll need to have at least one credit account open or take out a loan. You’ll also want to ensure your repayment information is reported to the three main consumer credit bureaus. Learn more about the different approaches to establishing credit and getting great credit scores.
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Building credit may sound daunting, but it isn’t hard once you know how to get started. Earning higher credit scores can be a little trickier, but we’ll teach you how to do that as well.

Credit is a cornerstone of financial life in the United States, and if you’re starting from scratch, your first step will be establishing your credit history. This means opening or getting added to an account, often a loan or credit card, that’s reported to at least one of the major U.S. consumer credit bureaus — Equifax, Experian or TransUnion.

The trouble is that many companies want to check your credit before agreeing to give you a loan or credit card, and they may be hesitant if you don’t have a credit history. Fortunately, there are several ways around this potential roadblock. Keep reading for some things you can do to start building your credit from scratch.

Get a credit card

A credit card may be worth considering when you’re just starting out on your credit journey.

Keep in mind that there are different types of credit cards out there, so you’ll want to look for cards that don’t charge an annual fee, or require you to pay interest or carry a balance to build credit.

Here are some good options worth vetting for your first credit card.

Secured credit cards

Credit card companies offer secured credit cards specifically for people who are new to credit or rebuilding their credit. To apply for a secured card, you’ll need to send the company a refundable security deposit. You’ll get the deposit back once you close your account, assuming you don’t owe the company any money at that point. The best secured credit cards won’t have an annual fee and will report your account to all three credit bureaus.

Student credit cards

Many major credit card issuers offer student credit cards to eligible college students, including a few cards that have rewards programs and no annual fee. Student credit cards work like other unsecured credit cards and don’t require a security deposit.

How old do I have to be to get a credit card?

If you’re a student under age 21, you might need a co-signer to get a card unless you can prove you have a steady income. Another way to get a card: A parent or trusted friend could add you as an authorized user on their account.

Retail credit cards

Retail credit cards, such as a credit card from a department store, may have less stringent approval requirements than other cards. But these cards tend to come with high interest rates and low credit limits — and sometimes you can only use the card at the store it’s associated with.

‘Cash-flow underwritten’ credit cards

Several companies are taking a new approach to determining who qualifies for their credit cards. If you have credit history, they do look at it. But if you’re new to credit, they may consider looking at an eligible bank account instead — possibly helping your chances of being approved. When credit card companies base approval in part on your personal cash flow (the money coming into and out of your bank account), the cards are sometimes referred to as “cash-flow-underwritten” credit cards.

No matter which credit card you apply for, try to make a habit of only using it to buy what you can afford to pay off. Check out our guide to using your first credit card, which can help you understand the benefits and risks of this popular financial tool. 

Become an authorized user on a credit card

If getting a credit card of your own has proven to be a challenge, you could ask a family member with a solid credit history to add you as an authorized user on one of their credit cards.

As an authorized user, you can receive a credit card in your name that’s associated with the account. The credit card company may start reporting the account’s information to the credit bureaus under your name, which adds you to the bureaus’ databases.

Company policies differ, so double-check with the issuer and ask if it reports authorized users to the credit bureaus. If it doesn’t, becoming an authorized user won’t help you build credit.

While becoming an authorized user can help you, keep in mind that it also puts your credit in someone else’s hands. If the primary cardholder pays their bills on time and maintains a low credit card balance, your credit could benefit. But if they pay a bill late, that can also get reported under your name and could hurt your credit.

Start with a loan

If higher education is in your future, or you’re planning for a large purchase, another way to start building credit from scratch is by taking out a loan from a lender that reports to the credit bureaus. Generally, you don’t want to borrow money and pay interest solely to build credit. But taking out a loan for school or to finance a major expense may be a wise long-term decision if you prefer to avoid credit cards.

Here are some types of loans to consider.

Student loans

If you’re taking out (or previously took out) student loans, there’s a good chance you’ve already started building credit. Most types of federal student loans (as opposed to private student loans) don’t require a credit check, so you may be able to get approved even if you don’t have credit. But your loans will still get reported to the credit bureaus, which can help you build a credit history.

Credit-builder loans

Banks, credit unions and online lenders may offer credit-builder loans for people who want to build or rebuild their credit.

Similar to a secured credit card, the lender will hold onto funds that secure the loan. For example, you may take out the loan, but rather than receiving the money the funds get set aside in a savings account until you pay off the loan. The lender will report your account status and monthly payments to help you build credit, and once you’ve made all your payments, the funds are released to you. 

Keep in mind that credit-builder loans may come with an application fee, and you may be charged interest on the loan. But your security deposit may also accrue interest, which might help offset some of the costs.

You might also consider working on your credit with Credit Karma’s Credit Builder plan.

Qualify based on your credit in another country

If you established credit in another country and then move to the U.S., your credit history won’t get added to the U.S. credit bureaus’ systems. But the credit you built overseas may not all go to waste.

International banks and card issuers have programs that can help existing customers get a credit card in the U.S. based on that relationship. They can then report the U.S. credit card to the bureaus to help you establish your credit here.

Add alternative data to your credit profile

Alternative data refers to information that traditionally hasn’t been widely found on credit reports, such as your history of making rent, utilities or cellphone payments. When you’re first starting out and have a thin file, additional accounts (with on-time payments) could help you build credit. If you can get this information to the credit bureaus, they may be able to add it to your credit reports.

Some companies allow you to link eligible bank or utility accounts. The programs look for qualifying payments or accounts that they can report to a bureau.

There are also services that you can use to add rent payment information to your credit reports. As with other alternative data, rent reporting programs may only report your information to one or two of the bureaus.

Is it possible to have a credit score of zero?

No, there’s technically no way to have a credit score of zero. You can have no credit history, and therefore no credit scores, but it’s not possible to have a score of zero. Most credit score ranges provided by major scoring models like FICO® and VantageScore 3.0 start at 300 and build from there.

Next steps: Build excellent credit

Once creditors start reporting information to the credit bureaus, the credit bureaus can use that information to create credit reports. Scoring companies can then analyze your credit reports to create credit scores.

Don’t worry if you can’t get a FICO® credit score immediately, because you need to have an account that’s been opened for at least six months on your credit report before you’re eligible for a FICO score. In contrast, VantageScore can provide you with a score after just one month. You can access your free VantageScore 3.0 credit scores from Equifax and TransUnion on Credit Karma anytime from any device.

As you start building credit, your financial goals may go beyond simply getting a credit score. Good or excellent scores can help you qualify for the best offers and not get held back by a lack of credit. Here are some steps you can take as you work toward building excellent credit.

  • Pay your bills on time. One of the most important credit-scoring factors is your payment history. Try to have a system in place to remind you when bills are due, and make at least the minimum payment on time. Even accounts that don’t generally get reported to the credit bureaus can matter because unpaid accounts can get sent to collections, which can hurt your credit.
  • Use your credit cards sparingly. Another important scoring factor is how much of your available credit limits you’re currently using — also known as credit utilization. Only using a small portion of your available credit is best for your scores (experts recommend keeping your utilization below 30%).
  • Open different types of accounts. Although it’s not as important as your payment history or utilization, having a mix of installment loans and revolving credit card accounts can also help your credit scores.

While there are many intricacies to credit, you don’t need to know all the ins and outs to build excellent credit. Start by opening accounts with creditors that report to the main consumer credit bureaus, paying your bills on time and limiting your credit card usage and, over time, you can get there.

About the author: Louis DeNicola is a personal finance writer and has written for American Express, Discover and Nova Credit. In addition to being a contributing writer at Credit Karma, you can find his work on Business Insider, Cheapi… Read more.