How To Build Your Credit From Scratch

As of 2010, 26 million consumers in the United States were credit invisible, representing about 11 percent of the adult population. An additional 19 million consumers, or 8.3 percent of the adult population, had credit records that were treated as unscorable by a commercially-available credit scoring model. These records were about evenly split between those that were unscored because of an insufficient credit history (9.9 million) and because of a lack of recent history (9.6 million). If you’re a regular reader of this blog, you probably won’t fall into those categories, but if you trying to help friends and family get started and build their credit score from scratch, this post might be useful. If you’re trying to improve your score or want to learn more about how it works, then you should probably read this previous post.

I’ve listed a few options below but always remember to be organized and pay on time. No matter what tricks you use, if you’re missing payments, you can not build a good credit score. Also keep track of it with free services such as Credit Karma or Credit Sesame.

Build Your Credit

Become An Authorized User

This is the easiest way to get started and probably many young people have gone this route. Most likely the person helping you out would have to be a family member or someone really close to you that would trust you with their card. Make sure they a good credit score themselves because accounts you’re an authorized user on will appear on your credit report They actually don’t even have to give you the card, as all activity on the account will be reported to your credit score anyway.

I mentioned above to make sure they have goof credit because if they mess up their credit, they will make things harder for you as well. Essentially, the primary account holder’s actions look like your own. If they have a late payment, you have a late payment. If they max out their cards, so do you.

Apply For A Secured Credit Card

If you’re starting from scratch, then you might wonder how can you do this on your own? You need to have credit cards to have a good credit score, but you also need a good score to get a credit card. While that’s true, it only applies to unsecured credit cards. So you will need to look at secured cards instead.

A secured card requires a cash collateral deposit that becomes the credit line for that account. For example, if you put $200 in the account, you can charge up to $200 on your card. There’s no risk involved for the bank, since you’re using your own money. These cards come with high APR and fees usually so make sure to pay on time and in full.

When you decide which secured card to get, you should look for a credit card issuer that reports information to all three major bureaus. This way you’ll build credit with all three of them. Also make sure to get a card that has a low annual fee, or no annual fee at all. If you’re able to convert it to a unsecured card later, that would be even better since a longer average age of accounts helps your score. DoC has a great post on secured credit cards.

The Discover It Secured Credit Card should be your best option, since it has no AF, and 1% cash back on every purchase. 2% cash back at restaurants or gas stations on up to $1,000 in combined purchases each quarter. And you can also upgrade it to a unsecured card.

Apply for a Secured Loan

Secured loans are similar to secured credit cards. You will need a cash collateral deposit in an account that will guarantee that you will pay the loan in full. So if you take out a $500 secured loan, you will need to deposit $500 first.

Although it looks similar to the secured card, this is a different type of loan that will help diversify your credit history. It’s better to have a loand and a credit card in your report, than just two credit cards.

Open Store Credit Cards

Store cards don’t usually make sense for people with good credit, unless they come with some great benefit or if you’re able to get them without a hard pull. But they are a good option for those starting out, or even people with bad credit. The good thing about store cards is that you don’t need a high a credit score to to qualify for one. Banks are more lenient with store cards, although they will usually give you very low credit lines. That shouldn’t matter though as long as you use it (try to stay under 30% of credit limit) and pay it on time. You can even open a few store cards, which will give you a higher credit limit in total.

Pay Your Rent And Make Sure It’s Reported

Paying your rent on time shows responsibility and you will get rewarded for it. There’s a few reporting agencies that your rent payment records to your credit report, helping to build a positive history of on-time payments.

Experian acquired RentBureau in 2010 and your rental payment history can now be factored into your credit score. RentTrack report your payments to all three major credit bureaus and can apply 24 months of back payments to your credit history. You have to make sure your landlord is registered for the service, for it to be reported. Otherwise, you will need to register and pay yourself.

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3 thoughts on “How To Build Your Credit From Scratch

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