Building Credit from Scratch

It takes credit to build credit, but if no one will give you credit without a credit score, what do you do?

It’s not as hard as you think to build credit from scratch. Before we show you how to build credit, though, we’ll explain what credit is and why it’s important. 

What is a Credit Report?

Your credit report is a log of your financial behavior, home addresses, and employers. It’s a log for lenders to use to determine if you’re a good or risky borrower.

Your credit report shows:

• If you paid your bills on time
• How much of your credit lines you have extended
• The balance on your installment loans or mortgage loans
• Any public records, such as bankruptcy or foreclosures
• Current and previous addresses
• Current and previous employers

What is a Credit Score?

A credit score is a number between 300 – 850 that shows your level of financial responsibility. The higher your credit score is, the more loan options you’ll have when you need to borrow money.

Your credit score is made up of five factors:

• 35% Payment history – Any bills you pay over 30 days late can bring your credit score down fast
• 30% Credit utilization – This is the amount of credit you have outstanding compared to your total credit line (any utilization over 30% can hurt your credit score)
• 10% New credit – Any new inquiries you have, knock a few points off your credit report
• 15% Credit length – This is your credit’s ‘age’ and the older it is the better it is for your score
• 10% Credit mix – Having a balance of revolving debt and installment debt helps your credit score the most

How do you Get a Credit Score?

There are three credit bureaus – TransUnion, Experian, and Equifax, each of which creates a report of the debts creditors report to them. Not all creditors report to all three bureaus, so it’s important to find out who a creditor reports to when you’re trying to build credit.

Keep in mind too that not all debts get reported to the credit bureaus. For example, rent, insurance payments, and tuition payments don’t get reported to the credit bureau. But credit card payments, mortgage payments, and car payments get reported.

Just because certain debts don’t get reported, though, doesn’t mean you can ignore them. Any creditor, including medical facilities, can sell past-due debt to a collection agency and collection agencies almost always report to the credit bureaus.

What gets Reported on your Credit Report?

Your credit report shows lenders, landlords, and sometimes even employers your payment history or how well you handle your bills.

Common factors you’ll find on your credit report include:

• The date you opened the account
• The total credit line (if revolving debt)
• The total loan balance (if installment debt)
• Current account balance
• Payment history (did you pay on time)

How to Start Building Credit

Most lenders want to see your credit before they’ll give you credit, so how do you build credit from scratch?

Here are 6 ways.

• Get a secured credit card

A secured credit card means you put a deposit down for collateral. If you miss your payment, the credit card company can keep your deposit. Your credit line will be equal to the amount you put down, and they usually start at $200.

Most creditors will automatically check if you’re eligible for an unsecured card after 6 months of having the card.

• Become an authorized user

If you have a close family member with great credit, consider asking to be an authorized user on their credit card. This works well with parents and children. 

Before you become an authorized user, make sure the company reports authorized users to the credit bureaus, as not all do. The nice thing about being an authorized user is you don’t need to use the card to get good credit.

As long as your family member uses the card regularly and pays it on time, you’ll get the ‘good credit’ on your credit report.

• Apply for a department store credit card

Sometimes store-branded credit cards are easier to get when you don’t have any credit. Try a store like Target or Walmart first. They have relaxed guidelines and will often approve applications even for people with no credit.

To make the department store credit card work for you, only charge up to 30% of your credit line and make your payments on time to build a great credit score.

• Take out a car or student loan

You can build credit from more than just revolving debt (credit cards). Car loans and student loans help too. The most important factor is your payment history. Make your payments on time and you’ll help build a good credit score fast.

• Use Experian Boost

If you have regular bills, but they don’t report to the credit bureau, try Experian Boost. This free service reports your on-time payments for your phone bills, utilities, and streaming services. All you have to do is link it to your checking account and when you make payments for eligible services, it gets reported to help you build a credit score.

• Use a co-signer

If you don’t have any credit, but want to open a credit card or take out a loan, ask a close family member to co-sign for you. Before you do, make sure they have good credit and will help your chances of approval. 

Keep in mind, if you default on your debt, your co-signer becomes responsible for it, so only use a co-signer on debt you know you’ll be able to pay back.

What is a Great Credit Score?

Like we said earlier, credit scores range from 300 – 850, which is a wide range. To have great credit, you’ll need a score of 781 or higher. It’s a great goal, but it might be hard to achieve right away. People with great credit have superior payment histories, keep their credit balances low, and only take out new credit when they absolutely need it rather than applying for any credit card offer that comes their way.

What is a Good Credit Score?

The average person has a ‘good’ credit score. Good credit ranges from 690 – 719 and isn’t hard to achieve. As long as you have good credit usage and don’t overextend yourself or pay your bills late, you can achieve a score within this range which is highly sought after by lenders. 

What is a Fair Credit Score?

A fair credit score is between 630 – 689. If you have a score within this range, it may be a little harder to secure credit. If you do get approved, it may be at a higher interest rate or with more fees. 

What is a Poor Credit Score?

A poor credit score is any score between 300 – 629. Scores within this range make it hard to secure new credit. Most lenders will turn you down with a score in this range, but fortunately, credit scores change monthly so you can always increase your score with good credit habits.

How to Fix Bad Credit

To fix bad credit, you’ll use the same techniques you’d use to build credit from scratch. Only this time you’re trying to undo bad habits. Most people with bad credit benefit from the following:

• Bring late payments current

Late payments are the most damaging to credit scores. Bringing your payments current as quickly as possible will help increase your score.

• Pay debts down

Any credit cards with more than 30% of the total credit line outstanding can hurt your score. Pay your balances down as quickly as possible to help your credit score improve.

• Don’t open new credit

If you have a bad credit score, opening new credit can make it even worse. Avoid applying for new credit and let your credit score naturally increase.

• Don’t close old accounts

It may be tempting to close old accounts, but it can hurt your credit score. The longer your credit age is, the better it is for your credit.

Key Takeaway

Everyone can build credit from scratch. It takes time, though – it won’t happen overnight. Use the steps in this guide to build credit one account at a time. No matter what credit you take out, make sure you can afford the payments, you make the payments on time, and you use the account to your advantage.

With the right steps, and possibly a little help from family or close friends, you can be on your way to building a great credit score!