Building credit from scratch can feel like a daunting task, but it doesn’t have to be. Whether you're fresh out of school or simply haven’t used credit before, starting with the basics is key. And the good news? Building a solid credit score is completely doable with a few smart, easy-to-implement strategies. In this guide, we’ll take you step-by-step through the process of building credit from scratch so you can take control of your financial future.
At its core, your credit score is a three-digit number that reflects your creditworthiness—essentially, how likely you are to pay back money you've borrowed. Lenders use this score to determine whether they should offer you credit, like a loan or credit card, and at what interest rate. A higher score means better rates and more opportunities.
As of March 2024, the average credit score in the United States is 705, based on the VantageScore 3.0 credit score model, which reflects a moderate level of financial health across the population. The most common credit score is the FICO score, which ranges from 300 to 850. A score above 670 is generally considered good, while anything over 740 is excellent.
Your credit score is based on five major factors:
Understanding these basics sets the stage for you to start building credit, even if you have no history yet.
Before you start building your credit, it’s important to know where you stand. You can get a free credit report from each of the three major bureaus (Equifax, Experian, and TransUnion) once a year at AnnualCreditReport.com. This allows you to verify that you don’t already have a credit history or any errors that need correcting.
When reviewing your credit report, pay attention to:
A secured credit card is a great starting point for building credit because it’s easy to qualify for, even if you have no credit history. With a secured card, you put down a cash deposit (often $200 to $500), which acts as collateral and typically becomes your credit limit. Your usage and payments are reported to the credit bureaus, helping you build a score over time.
Look for secured cards with:
Some banks even allow you to graduate to an unsecured card after a period of good payment history, making this a great long-term tool.
Another way to build credit is by becoming an authorized user on a family member’s or friend’s credit card. You’ll benefit from their positive credit history without being responsible for making payments. This can help you quickly boost your credit score, especially if the cardholder has a long credit history and a low balance.
When asking to become an authorized user, explain that you’re working on building your credit and assure them that you won’t need to use the card. It’s a no-risk situation for them but a great boost for you.
Credit-builder loans are small loans designed specifically to help you build credit. The way it works is simple: the bank holds the loan amount in a savings account, and you make monthly payments. Once you’ve repaid the loan in full, the money is yours, and the payments you made are reported to the credit bureaus, boosting your score.
Credit-builder loans are typically offered by credit unions and smaller community banks. You can also find them through online banks or apps specifically designed for credit building.
The most important factor in your credit score is your payment history. Paying bills like credit cards, utilities, or rent on time shows lenders that you're responsible. Set up automatic payments if you need help remembering due dates.
Your credit utilization rate is how much of your available credit you're using. Aim to keep this number below 30%. For example, if you have a $1,000 limit, try to keep your balance below $300. This shows lenders that you can use credit responsibly without relying on it too heavily.
Every time you apply for credit, a hard inquiry is made, which can temporarily lower your credit score. Too many inquiries in a short time might make lenders wary of extending credit to you.
"Applying for too much credit at once signals risk to lenders and could lower your credit score. Hard inquiries from credit applications can temporarily drop your score by 5 points or more."
Once you’ve taken steps to build your credit, it’s important to keep track of your progress. Many services, like Credit Karma or Credit Sesame, offer free monitoring, so you can keep an eye on your score and spot any changes.
Checking your credit score every few months is a good rule of thumb. This way, you can catch any potential issues early, like errors on your report or sudden drops in your score.
Credit scoring models like to see a mix of credit types, such as credit cards, loans, and possibly even a mortgage or car loan. As your credit improves, you might consider adding different types of credit to your profile to show lenders you can handle multiple forms of debt.
You don’t need to rush into opening multiple accounts. Start slow—maybe with a credit card and a small loan—and build up your credit profile over time. Only add new accounts if you can manage them responsibly.
Even one missed payment can damage your credit score, so make sure you’re staying on top of all your bills.
Using up all of your available credit will negatively impact your score. Try to keep your balances low to maintain a healthy credit utilization rate.
Closing old credit accounts can actually hurt your score by reducing your overall credit limit and shortening your credit history. If you have an old account in good standing, consider keeping it open, even if you don’t use it often.
In today's digital age, leveraging technology can make managing and building your credit simpler and more efficient. From budgeting apps to credit score trackers, there's a wealth of tools designed to help you stay on top of your financial game.
Utilize apps like Credit Karma or Mint to check your credit score and report regularly. These platforms offer insights into your financial health, alert you to changes, and provide personalized tips to improve your score.
Apps such as YNAB (You Need A Budget) or PocketGuard can help you manage your expenses, ensuring you never miss a bill payment. Keeping your finances organized is key to avoiding late payments and high credit utilization.
Set up automatic payments through your bank's mobile app to ensure all your bills are paid on time. This simple step can significantly impact your credit score by maintaining a positive payment history.
By integrating technology into your credit-building journey, you can streamline your efforts and make informed decisions with ease. These tools are designed to support you every step of the way, making credit management a breeze.
Harness the power of debt repayment calculators available online or through apps to create a personalized repayment plan. These tools allow you to input your debts, interest rates, and monthly payments to visualize how long it will take to pay off your balances.
By using these calculators, you can experiment with different payment strategies to find the most efficient way to reduce your debt and improve your credit score. They provide a clear path forward, making the daunting task of debt management more approachable and manageable.
Building credit from scratch doesn’t have to be overwhelming. By taking small, manageable steps—like checking your credit report, opening a secured card, and paying your bills on time—you’re already on the right track. The key is consistency and patience. With the right habits in place, you’ll see your credit score grow, opening the door to more financial opportunities down the line.
