How to Build Credit From Scratch

Building credit from scratch can feel daunting, especially when you’re just getting started. It can seem like every lender wants you to have established credit before they’ll give you a half-decent account.

Fortunately, there are ways to get around that problem. After all, we all start with no credit history, and if others can overcome that hurdle, so can you.

This guide will teach you what goes into a credit score, show you how to build credit from scratch, and explain the habits that will help you maintain your score long term.

What You Need To Build Credit From Scratch

Unfortunately, the American education system still fails many of its attendees when it comes to personal finance. Almost 40% of American adults agree with the statement “I have no idea how my credit score is calculated,” at least to some degree.

If you count yourself among them, here are the basic steps to follow when creating a good credit score.

Get a Mix of Credit Accounts

The first step to building a good credit history is to accumulate credit accounts. That may seem contradictory to those who think you need good credit to qualify in the first place, but that’s not necessarily the case.

Many types of credit are accessible to people without a credit history. Your job is to start with those and gradually build-up to the more selective (and rewarding) accounts.

Your goal should be to build a diverse mix of credit accounts that include both types of credit:

• Installment accounts: These disburse a lump sum that you pay back in regular installments. Think of an auto loan, personal loan, or student loan.
• Revolving credit: A user can draw on these accounts up to their credit limit, pay off their balance, then repeat. Common examples include credit cards and lines of credit.

Your credit mix is worth 10% of your FICO^® Score, the most popular among lenders. It’s even more significant under VantageScore^® (their closest competitor), which considers credit mix and experience “highly influential” for their formula.

Pay Them On Time

Once you’ve acquired a good mix of credit accounts, use them to demonstrate your responsibility with credit. That means making your monthly payment on time without fail.

If you want to build credit, do everything within your power to make sure that happens. Your payment history is the most significant factor in your FICO Score, accounting for 35% of your credit score.

The negative effect of even a single late payment on your credit score can be significant, especially to someone with a limited credit history.

Generally, lenders will report your missed payment to the credit bureaus (meaning it will show up on your credit report and hurt your score) after it’s 30 days late.

The further behind you are on the payment, the worse it will be for your credit. For example, being late by 60 days hurts your credit more than being late by 30 days.

Consider keeping a cash buffer on hand in a checking account and setting up minimum autopayments so that nothing slips through the cracks.

Keep Balances on Revolving Lines of Credit (Credit Cards) Low

Revolving lines of credit often make or break attempts at building credit. While the average installment loan will go to a non-discretionary purchase like your home or vehicle, credit lines and credit cards are more flexible.

That flexibility gives users the ability to overspend, and it can lead to trouble. Do your best to keep the balances on your credit cards and lines of credit low. If you’re having trouble, try switching to a debit card once you reach a certain level of credit card debt in a month.

Not only will that encourage responsible spending habits and help you make timely payments, but your credit balances are a significant factor for both FICO and VantageScore.

They account for 30% of your FICO Score, making them the second-most important variable after payment history. VantageScore gives it even more weight, labeling it “extremely influential” and giving it the top spot in their formula.

Try to keep your average credit utilization ratio (outstanding balance divided by credit limit) as low as possible. For example, if you have a $400 credit card balance on a credit card account with a $2,000 limit, your credit utilization is 20%.

Traditional wisdom says that the ratio you should use as an upper limit is 30%, but lower is always better. Consumers at or near exceptional credit (a FICO Score of 800 or more) have an average credit utilization of 7%.

That doesn’t mean you shouldn’t use the accounts at all (you must if you want to build credit), but you should pay off your balances before they get too high.

The Types of Accounts to Get for New Credit

When you’re looking for your first credit accounts, you won’t have as many choices as someone with good credit, but there are still plenty of options out there.

Here are some of the most accessible and affordable accounts that build credit for people with a brand new credit history.

Credit Builder Loans

Credit builder loans are one of the best borrowing options for someone looking to expand the installment side of their credit mix. Here’s what they have going for them:

• They usually don’t require a credit check, so they’re readily available to people with no credit history.
• No credit check means no hard inquiry, which protects your score (too much new credit can cost you points).
• The proceeds go into a locked savings account until the final payment, so you’re building credit and savings simultaneously while giving the lender the safety of a secured loan.

Credit Strong has always known that our credit builder loan works well, but we don’t want you to take our word for it. We wanted to prove our results so our customers could feel as confident as we are.

To that end, we studied the results of more than 50,000 Credit Strong credit-builder account holders. What we found was inspiring.

We found that Credit Strong account holders who had no credit score when they opened their accounts earn an average score between 630 and 650 with just 12 months of timely payments!

Credit Strong account holders that had a score, increased that score by an average of 70 points(!) if they made just 12 months of on-time payments.

Our accounts are also customizable. You can always accommodate your highest priority, whether that’s the lowest possible monthly payment, the maximum chance to impact your credit score, or the fastest path to building savings.

Check out our pricing and plans here. 

Secured Credit Cards

A secured credit card is one of the most common revolving account choices for people building credit from scratch. They’re ordinarily easy to access, even if your credit score is low or nonexistent.

That’s because they require the borrower to put down a cash deposit, which usually then becomes the total available credit for the secured card.

Borrowers can’t spend more on the credit line than the deposit amount the lender holds as collateral, which minimizes their risk.

If you need a revolving credit account, a secured credit card is one of the best places to start. Many lenders create secured cards specifically for people with no credit history.

They’re not usually the most glamorous accounts (you probably won’t get more than 1% cashback if you get any credit card reward at all), but they shouldn’t be expensive either. You should be able to find one without an annual fee and they are a great stepping stone to obtain rewards and cashback cards in the future.

Before applying for a secured credit card, make sure to check whether the card issuer will let you roll the line into an unsecured credit card after demonstrating your responsibility. Many of them will do so after somewhere between six and twelve months. 

Become an Authorized User

While there’s no substitute for opening accounts and building your own credit history, becoming an authorized user on someone else’s credit line can help you get a head start without much effort.

An authorized user can use a line of credit much like its owner, but they don’t have the same liability for balances as the account holder.

If you’re an authorized user on an account, its activity will influence your score, whether or not it’s you making the purchases or the payments.

Consider asking someone close to you to add you to their account for some easy points, provided that you trust them to manage the card properly. If they have bad credit or miss payments, it will end up damaging your score too.

One important note on authorized users, you should never pay to be added as an authorized user on the account of someone you don’t know, especially if you won’t get access to the account. 

In most cases this is a violation of the terms of service of credit card issuers and in some cases can be a crime if you include the information on an application for credit.

Student Credit Cards

Secured cards may be the traditional starter card, but student credit cards are probably the better option if you can qualify. Only students that are under 21 years old can apply.

They’re not as readily available as they used to be since the Credit Card Act of 2009, but that’s probably a good thing. Lenders now have to verify that people under age 21 can pay their debts before giving them an account.

You’d think that would be a given, but it wasn’t always the case, and it caused a lot of financial problems for young people back then.

Nowadays, you’ll need to show proof of independent income or have a quality cosigner to qualify for a student credit card without a credit score.

They usually have a relatively low credit limit, but they make up for it by being unsecured and having rewards that cater to students, such as cashback for good grades.

Student Loans Help Build Credit

Whatever other faults they have, student loans do help you build your credit history. If you have to take some out for college, they’ll be a good start to expanding your credit mix into installment debt.

Of course, it’s a terrible idea to take out a student loan just to build your credit, but you might as well take advantage of every positive aspect of them that you can.

Fortunately, federal student loan rates are relatively low. Once you graduate and your monthly installments begin, you should be able to keep up with your payments (an income-driven plan could help). Be sure to make them on time.

Car Loans With A Co-Signer

Many people building credit from scratch are between the ages of 18 and 20 years old. In that case, you may be looking to buy your first vehicle around the same time.

If you’re buying a car anyway, an auto loan can be an easy way to build credit.  

However, car loan interest rates are often higher than other forms of debt for people with poor credit or no credit history.

To get an affordable interest rate, ask a parent or other family member with a good credit score to be your cosigner. That can help you bring your costs down to an acceptable level, and the savings are significant.

The average difference between the new car interest rate on an auto loan for someone with prime credit versus someone with subprime credit is a whopping 7.24%.

Good Credit Habits to Start Now

Like many personal finance challenges, building credit is a marathon—not a sprint. 

Taking the time to lay a solid foundation of good credit habits from the beginning is crucial to maintaining a high score over the years.

Here are some of the best ones to start implementing today.

Monitor Your Credit Reports and Scores with a Free Tool

A credit report is a compilation of your personal credit history put together by a credit bureau. They serve as the foundation for your credit scores, and it’s a good idea to check them regularly.

They contain valuable insight into your credit score so you can look for the weak spots in your credit profile and plan accordingly. Any unrecognized activity can also be an early indicator of identity theft.

Each major credit bureau (Experian, Equifax, and Transunion) has its own report, and they might be different if your lender shares with one and not the others.

Usually, you can get a free copy of your credit reports each year from Annual Credit Report.com. Because of the pandemic, they’re free every week through April 2022.

Staying on top of your credit scores is even easier these days. Check with your credit card company or financial institution to see if they have a tool that can do it for you.

Failing that, you can always use free services like Experian (for your FICO Score) or Credit Karma (for your VantageScore).

Be Careful of Late Payments

Remember, late payments can sink your credit score faster than just about anything else, short of something drastic like bankruptcy. You must implement an effective system for making payments on time.

It may seem like it should be a relatively simple thing to do, but approximately 47 million American adults expect to miss a credit card payment in 2021. Don’t let yourself be one of them.

One good strategy is to build up your savings and set aside a portion of your bank account for emergency debt payments.

You can then set up an autopay on your accounts and rest easy since you won’t have to worry about forgetting one or getting hit with overdraft fees.

Get Started Today

The sooner you start building credit, the better off you’ll be. Length of credit history is another factor in your credit score (worth 10% of your FICO Score).

Even if all you do is open up a credit card and buy a candy bar with it every month, it will increase your score over time. Don’t wait to start building credit. Look for your first account today!