How to Build Your Credit from Scratch
Whether a young adult just starting out or a new resident of the US, at some point in your life, you will need to start thinking about building your credit score.
It’s one of the most important numbers in your financial life, but applying for credit can be tricky. To have a FICO score at all, you need at least one account that’s been open six months or longer, and you need at least one creditor reporting your activity to the credit bureaus in the last six months. So how is anyone supposed to build credit when you are starting from square one and no one will give you credit in the first place? Luckily there are many resources out there to help people who are just beginning to establish their credit history. Here are some ways to build your credit from scratch:
Apply for a Secured Credit Card
A secured credit card can be a great and relatively easy way for someone to build their credit from scratch. A secured card requires an upfront cash deposit which is equal to a line of credit and acts as collateral if you default on your loan. For example, if you deposit $1,000 as security, you now have a card with a line of credit up to $1,000.
By making on-time payments and keeping your account balances well below your credit limits, you can start to build a great credit score from scratch. Over time, you can later apply for an unsecured credit card and your issuer will return your initial deposit.
Get a Credit-Builder Loan
While a secured credit card can be a great option for building credit, you need to start with enough money to put up as a security deposit. If you don’t have enough money for a deposit, a credit-builder loan can be a great alternative. They are just what they sound like – designed to help people with bad or no credit. They are typically offered by smaller banks and credit unions. Since you have little proof to show that you are a responsible borrower, the bank protects itself by requiring you to make monthly deposits towards to loan. Once you pay off the loan as agreed, the bank will release the funds to you and will send a good report to the credit bureaus.
Become an Authorized User
For someone looking to build their credit, becoming an authorized user on a parent or significant other’s card can certainly help. An authorized user will receive a credit card in their own name which they can use to make purchases on the account without being legally obligated to pay for the charges. If the authorized user and the account holder both practice good credit habits, you can both raise your scores. It’s important to check if the credit card issuer will report authorized user activity to the three credit bureaus. If not, you may want to consider an issuer who does so as not to waste your efforts.
The account holder may want to ask the authorized user to adhere to guidelines such as how much they can spend and when they should pay the account holder for their share of the loan. Keep in mind that any activity on this card, good or bad, by either one of you will be reflected in both your credit scores, so don’t abuse this opportunity.
Student Credit Cards
Like a secured credit card, student credit cards are usually an easily accessible way to build credit. For the most part, students will need to have a source of income and obviously must be enrolled in a school, but other cards may require a co-signer. Student credit cards can teach scholars how to be financially responsible and many cards come with advantages such as rewards for paying on time, receiving good grades, and lower interest rates over time. It’s important for students not to get carried away as interest rates tend to be higher than average for student credit cards.
Apply for Store Credit Cards or Gas Station Cards
Store credit cards and gas station cards are relatively easy to receive approval for and can give consumers various rewards, making them very appealing to people looking to build credit. Like student credit cards, these cards come with very high interest rates and offer a low credit limit, but paying bills on time and in full can certainly help to build credit. Consider only applying for one or 2 cards at places you shop regularly, as applying for many cards in a short period of time will negatively impact your score.
Get a Co-signer
Having a cosigner can be a big help in securing a loan when you have no credit history, but it will also result in the cosigner being responsible for the loan. Generally, any co-signer arrangement should be entered into carefully and with caution. It is important both of you understand the repercussions of co-signing a loan before putting yourselves in that position. Your co-signer is essentially pledging to pay the loan should you be unable to. Failure to pay by you or your co-signer can result in negative reporting on both your credit reports or even collection activity including law suits. If you are looking to arrange for a co-signer, consider asking a parent or spouse rather than a friend or other family member.
Building credit from scratch can be tricky, but with a few of these methods, a few months of good financial habits, and some patience, your credit score will be off to a great start in no time. As you continue to establish credit, be sure to understand how your credit score is calculated so you’ll know exactly how to build the perfect credit history. How did you start to build credit? What other resources are out there to help people build their credit from scratch? Feel free to leave us your comments below!