How to Build Credit From Scratch
Your credit profile can affect several parts of your financial life. Lenders review it when you apply for a loan, landlords may check it before approving a rental application, and credit card issuers use it to determine your eligibility and interest rate. If you’re new to credit, getting approved be challenging because lenders want to see a record of how you manage borrowed money.
Establishing credit for the first time, but you can get started with a few consistent habits. In this guide, we’ll walk you through the steps to begin building your credit profile and working toward a credit score.
What Does It Mean to Build Credit?
Your credit profile includes information about how you've borrowed and repaid money over time. Lenders use this information to help assess how likely you are to repay what you owe. A credit score summarizes information in your credit profile as a number, usually ranging from 300 to 850, depending on the scoring model. In general, a higher score indicates that you’ve managed credit responsibly.
Having no credit history is different from having a low credit score. If you're new to credit, there may not be enough information in your credit reports to generate a score. A low score, on the other hand, reflects an existing credit record that may include late payments or high balances.
How to Build Credit From Scratch
1. Check Your Credit Report for Existing Records
Even if you’ve never opened a credit account, it’s worth checking your credit reports. You can request free reports from Equifax, Experian, and TransUnion through AnnualCreditReport.com.
You’re entitled to a free report from each of the three bureaus every week. A report may already exist because of an old account, a mix-up with someone who has a similar name, or someone using your personal information.
If you spot an error, dispute it with the credit bureau that issued the report. It’s also a good idea to check your reports regularly as you build your credit history. Reviewing them at least once a year can help you track what’s being reported and catch mistakes early.
2. Open a Secured Credit Card With a Refundable Deposit
A secured credit card works much like a regular credit card, but you provide a refundable deposit when you open the account. That deposit usually determines your credit limit, so a $300 deposit typically gives you a $300 limit. Depending on the issuer, you may get your deposit back when you close the account or upgrade to an unsecured card.
Before applying, compare annual fees, interest rates, and credit reporting policies. Make sure the issuer reports your payment activity to the major credit bureaus. Without that reporting, your payments generally won’t help you build a credit history with those bureaus.
3. Ask a Trusted Person to Add You as an Authorized User
When someone adds you as an authorized user on their credit card, the account’s history may appear on your credit report. Choose someone who pays their bills on time and maintains a low balance. Their payment habits and credit use could influence your credit profile, so it’s important to choose someone who manages their account responsibly.
The effect on your credit depends on the card issuer and the information it reports to the credit bureaus. Before relying on this option, ask the issuer whether it reports authorized users’ account activity to the bureaus.
4. Compare Credit-Builder Loans Before Applying
A credit-builder loan lets you build a payment history while saving money. Instead of receiving the loan amount upfront, you make monthly payments while the lender holds the funds in an account. Once you’ve paid off the loan, you receive the money. If the lender reports your payments to the credit bureaus, those payments can help you establish a credit history.
This is also what we offer at First Pioneers, you can learn about our credit builder loans in more detail here.
Before signing up, review the fees, repayment terms, and monthly payment amount. Choose a loan you can afford within your budget, since missed payments can hurt your credit.
5. Pay Every Bill on Time, Every Month
Payment history is one of the main factors in most credit scoring models. A payment that’s 30 days or more late may be reported to the credit bureaus and remain on your credit report for up to seven years. To avoid missing a due date, set up autopay for at least the minimum payment or use calendar reminders to stay organized.
6. Keep Your Credit Card Balance Low Compared to Your Limit
Credit utilization measures how much of your available credit you’re using. For example, if your card has a $500 limit and a $150 balance, your utilization rate is 30%. As a general rule of thumb, aim to keep your credit utilization below 30%. Lower utilization is generally better for your credit score.
Paying down your balance before your statement closes can help keep the amount reported to the credit bureaus low.
You can use your card for a small purchase, such as a streaming subscription, and pay the full balance each month. This lets you build a payment history without paying interest on a balance you carry over.
7. Check Whether Your Rent or Utility Payments Can Be Reported
Your rent and utility payments may help you build credit if they’re reported to the credit bureaus. Check with your landlord or utility providers to see if they offer credit reporting. You can also explore services such as Experian Boost, which may let you add eligible utility, phone, and other payment history to your Experian credit file.
Read also: Don't Fall for These Common Credit Myths
How Long Does It Take to Build Credit From Scratch?
A new account typically appears on your credit report within 30 to 60 days, often after your first statement cycle. Some credit scoring models require at least six months of account history before generating a score, while newer models may be able to score you sooner.
The timeline depends on the scoring model, the type of account you open, and how you manage it. If you don’t see a score right away, give your accounts time to build a record.
Can You Build Credit Without a Credit Card?
Yes. You can build credit without opening a credit card in your own name. A credit-builder loan can help you establish a payment history, and becoming an authorized user on someone else’s card may allow their account history to appear on your credit report.
You can also use rent-reporting services to report your rental payments, while certain programs let you add eligible utility and phone payments to your credit file.
Keep in mind that not every service reports to all three major credit bureaus, and not every credit scoring model includes this information. Before signing up, check which bureaus receive the data and which scoring models may use it to calculate your score.
Read also: Can I Get a Personal Loan with a Low Credit Score?
Start Building Credit Today
Building credit takes time, so focus on developing good financial habits and using credit responsibly each month.
If you’re ready to take the first step, the team at First Pioneers FCU is available to answer your questions and guide you through the process. We offer a range of financial products and services, along with in-house financial counselors who can help you build your credit. Give us a call or visit one of our local credit union branches in Lafayette or New Iberia to discuss your options and find a starting point.