6 Tips for Building Credit from Scratch

If you’re starting out financially, the first step is establishing your credit history. But, building credit can be a challenge. If you have no credit history, it’s hard to get a loan, a credit card, or even an apartment. 

So, how can build credit if no one will give you credit? You need to actually have credit in order to build credit from scratch. It may seem a little backward, but that’s how it works. But don’t give up yet. There are a few ways to start building your credit. Here are some tips that can help you get started.

What is Credit History and Why is it Important?

Your credit history is an evaluation of your ability to pay back a debt. It’s recorded in your credit report, which is a detailed record of your credit accounts and information about them. 

Your credit report also contains information about whether you pay bills on time, how much credit you have available, and the number of times you have applied for credit. In addition to your credit score, your credit report contains information about any public records related to past debt.

Credit ratings can affect more than borrowing money. Having good credit can get you more rewards. Credit card rewards programs, such as frequent flyer miles or hotel points for every dollar you spend, are expensive to administer. The people who are most likely to get credit cards with such rewards are the ones who have demonstrated a strong credit history in the past.

Credit is not just for borrowing. Credit reports can also affect people’s lives in ways that some people don’t realize. They can also be used as a resource to predict your behavior. For example, an auto insurance company might take credit histories into account when deciding if they’ll insure you and the cost of the premium. Landlords also use credit scores to predict whether you will be a good tenant. If your credit score is bad, it might be harder for you to find a place to live. And, employers might look at your credit history, too. Bad credit can keep you from getting hired.  

What is a Credit Score?

Credit scores are numerical predictors of how likely you are to pay back loans on time. Credit scoring is a mathematical model that uses information from your credit report to create a credit score.

Companies not only use credit scores to make decisions about whether or not you get a credit card, car loan, or mortgage. Credit scores are used to determine credit limits, interest rates, and insurance premiums.  

How to Start Building Credit

1) Get a Secured Credit Card

A secured credit card is an easy way to build credit because it requires a cash deposit to serve as collateral. This deposit acts as your credit limit, so you can only spend what you have. And, because the credit card company reports to the credit bureaus, you can build a positive credit history by making on-time payments.

Simply use your secured credit card as you would any other credit card. You must make at least the minimum payment on time each month. It’s also advantageous to pay the balance off each month so that you can use it again the next month.

After you’ve had your card a while, some credit card companies allow you to upgrade your account directly to an unsecured card if your account is in good standing. And, you’ll get your original deposit returned to you.

2) Become an Authorized User on Another Person’s Credit Card

If you have a family member or friend with good credit, you can ask them if they’ll agree to add you as an authorized user on their credit card account. As long as they make their payments on time, you’ll get the benefit of positive payment history reported on yours as well. Just make sure you trust the person to use it wisely. If the person pays their bill on time, it will help your credit score. But if they pay late, it will hurt your score too. 

A credit card authorized user is someone added to a credit card account by the primary cardholder. This is a beneficial way for someone to have their own credit card without having to apply for one, and it is an excellent way for parents to teach kids about credit in a safe way. 

Since you don’t have a credit history, the first score should be generated within six months. As long as the account is well-managed, this will help to build your credit. 

3) Take Out a Credit-Building Loan

If you need a little help building credit, you can take out a credit-building loan. These loans are designed for people with no credit history, and they work just like a regular loan, but with one important difference: you have to put up some money upfront. This money serves as the loan amount, and you can usually pay it back over a period of 12 to 18 months.

A credit-building loan, also known as a secured loan is a type of installment loan with fixed payments. It’s much like a personal loan, but the upfront payment acts as the collateral. The payments you make on your credit-building loan are reported to the credit bureaus and will help you establish your credit score. 

Credit building loans are offered by community banks, credit unions, and online lenders and you can typically request anywhere from $300 to $1000. 

4) Ask Someone You Know to Cosign for a Loan

If you don’t have a credit history, you can get a loan with someone else’s credit. This is a good option if you can find someone with good credit who trusts you to make your payments on time.

If you apply for a loan with a cosigner, the lender will look at your cosigner’s credit history. But once you get the loan and start paying it back, the payment history will be recorded on both of your credit reports.

When you take out the loan, be honest about what you can afford. Don’t take on a loan that costs more than you can afford. This will leave the cosigner to pay the debt should you default on it and hurt your credit. 

5) Apply for a Fingerhut Credit Card

Don’t worry if you’re not a big customer of Fingerhut. It’s still a good way to build up your credit score. With a $0 annual fee and lower credit score requirements than many store cards, Fingerhut Credit Account will help people with limited or no credit history build their credit standing. This can help you get approved for better credit cards in the future. 

Fingerhut issues revolving loans, which are the same type of credit that a traditional credit card offers. Just know that if you have a Fingerhut Credit Account, it’s best to pay the entire balance each month because their interest rate is steep. 

Keep in mind, that this is only for building credit so you should use it sparingly and not max out the account.

6) Pay All of Your Bills on Time

Now, you can get credit for your good bill-paying habits. Utility, cell phone, and car insurance companies usually don’t report to the credit bureaus when you pay on time. The same is true for most landlords.

However, you can invest in services that report these payments for you, creating new tradelines on your credit report. That lets you build a positive payment history even if you don’t have a loan or credit card yet.

Services like LevelCredit, Rental Kharma, and Rent Reporters allow you to have your rent payments and utility bills reported to the credit bureaus. These reporting services are a powerful tool to help you establish credit. Instead of paying your landlord or utility companies, you can pay through these sites, and they forward the payment. This will put your rent and utility payments on your credit report and establish a positive track record of on-time payments for all lenders. 

Final Thoughts

If you don’t have any credit, it can seem like a dream that’s impossible to achieve. But building credit is not impossible. You can build credit by opening accounts with major creditors and paying your bills on time. Use your credit card carefully and responsibly, and you can start to build your credit score.