How to Build Credit from Scratch


A strong credit history opens up a wide range of opportunities. You can get prime interest rates on major purchases like a home or car and can also become a prime candidate for apartments and jobs.

college student

But if you’re just starting out with your own finances, you may be confused over the best way to start building your credit. Not only have we gathered the best credit building products available to those without a substantial credit history, we’ll also teach you powerful habits to successfully build credit from scratch.

In just a short amount of time, you’ll notice your credit score increasing and your access to credit becoming less expensive.

The longer and more positive your credit history is, the better rate offers you’ll receive, meaning you’ll pay less interest and earn better rewards when you do decide to use a credit product.

5 Ways to Build Credit from Scratch

To build credit, you have to actually use credit. The catch-22, though, is that most lenders and credit card companies don’t want to extend an offer to someone with no credit history.

The reason for this is because there is no indication of how able and willing you are to repay what you owe. Luckily, there are a few different products you can use to overcome this issue while taking baby steps into the world of credit.

1. Credit Cards for Beginners

Opening your first credit card gives you the chance to show that you can charge money in an appropriate amount and make regular payments of at least the required minimum (or ideally, in full).

Secured Credit Card

There are a few different types of credit cards available to start building credit from scratch. The first is secured credit cards. To use a secured card, you’ll make a cash deposit to the creditor, which will be the same amount as your credit limit.

See also: How to Build Credit With a Secured Credit Card

However, your monthly balance isn’t paid off by the deposit. Instead, it’s your responsibility to make the payments, and this will help you build credit. If you don’t pay off the balance in full, you’ll accrue interest, and if you fail to pay altogether, your deposit is used as collateral. Try to find a secured card with a low annual fee and make sure it reports to all three credit bureaus.

Student Credit Card

Next is a student credit card, which is geared towards younger adults who are still in school. You’ll probably have a relatively low credit limit and a high interest rate, but you could qualify for rewards, cash back, or a promotional offer. If you don’t want a cosigner, you’ll likely need some sort of income (even part-time) to get approved.

Retail Credit Card

Another option to build credit from scratch is to get a retail credit card. Like student credit cards, these usually have high interest rates.

You can only use them at a specific retail chain but often receive perks like store discounts and coupons. They’re also quick and easy to get — the application process takes just minutes right at the sales counter.

See also: 8 Ways to Build Credit Without a Credit Card

2. Cosigner Loans and Credit Cards

Whether you’re looking for a loan or a credit card to build credit, you can use a cosigner to increase your chances of access to credit. In fact, if you’re a student and don’t have any income, you might be required to find someone who is over the age of 21 to serve as your cosigner. But don’t make this decision lightly.

Cosigners are legally obligated to pay your debt if you default. Not only that, your actions affect their credit. For example, just as late payments hurt your credit score, they hurt your cosigner’s score just as much.

It can also be difficult to remove a cosigner once he or she is on your credit card or loan. In fact, you may have to do a balance transfer or pay it in full for removal from a credit card, and you might even have to refinance for removal from a loan.

3. Become an Authorized User

Becoming an authorized user on someone else’s credit card is one of the best options to build credit from scratch. You can ask a close family member or a friend with a good credit score if they will add you to an existing credit card account. The better their credit is, the more it will help you.

You will be issued a credit card in your name, linked to their account. However, you don’t ever actually have to use the credit card or even be given the card for the account to be reported on your credit report. When the primary cardholder makes charges and pays the bill on time, it will be reported on their credit report and yours.

Your family members or friends do have the option of giving you a credit card, but they’re probably much more likely to add you if you tell them that you don’t want one. Explain to them that you just want to be added as a user and there’s no way it can hurt their credit by doing so unless they were to actually give you a card.

It’s important to note that if you are the authorized user on an account that is paid late, it will negatively impact your credit scores. So make sure the person you ask actually has a good credit score and always pays the bill on time.

4. Credit Builder Loans

Credit builder loans aren’t incredibly common and you’ll probably have to go to a credit union or small community bank to get one.

But the good thing is that it’s a low-risk way to build credit, or even rebuild a poor credit score. The way a credit-builder loan works is that you essentially repay the loan in advance of receiving any money.

When you’re approved for the credit builder loan, the money is transferred into a savings account — but you can’t access it yet. You then begin making monthly payments on your loan and once it’s paid off, you get the funds.

Yes, you could simply put away your own money into savings and then use it, but that doesn’t help your credit score. Your financial institution reports your on-time payments to the credit bureaus, lengthening your credit history and boosting your credit score.

Check out Self. They allow you to take out a loan in increments ranging from $550 to $2,200. The money is held in a CD account and earns interest while you make monthly payments for a year. You can also check out our full review of Self.

5. Rent Reporting Services

Services such as Rental Kharma and Rent Reporter offer to report your rent history to the three major credit bureaus. These services allow you to build credit by paying rent on time. Rent reporting services generally cost between $50-$100 upfront and then charge a monthly service fee of $10-$15.

young man at cafe

5 Habits to Help You Build Credit from Scratch

It takes more than getting a credit card or loan to build your credit scores. You also have to steward those accounts responsibly. A few routine habits will help keep your credit healthy, ensuring that your credit history is a positive one.

These steps strengthen your credit score and demonstrate that you are trustworthy with a creditor’s money. That way, they’ll be more willing to lend you more money if you need it, and at better rates.

1. Pay Your Bills On Time

Your payment history accounts for 35% of your credit score — the most heavily weighted category there is — which means it’s crucial to make timely payments each and every month in order to build a healthy credit history.

This doesn’t just apply to credit cards: student loans, cell phone bills, and utility bills all report late and delinquent payments if you fail to pay. Making full, on-time payments is the fastest way to either build or trash your credit, so it’s up to you which one you want to do. (But it’s pretty obvious, right?)

2. Carry Small Credit Card Balances (or none at all!)

When you get a credit card to build your credit history, the ideal scenario is to charge a little bit each month, and then pay off your balance by the due date. Having a credit card isn’t a license to spend frivolously; instead, it’s giving you the chance to prove yourself as a creditworthy individual.

If you do need to carry a balance for some reason, try to keep it under 30% of your credit limit. So, if you’re allowed to charge up to $1,000, you wouldn’t want to have a balance of more than $300 at any given time.

Clearly, the lower balance the better because you don’t want to spend outside your means and accrue outrageous interest that you’ll have to pay back over time.

3. Limit Your Number of New Accounts

While you might qualify for any number of the credit products we talked about above, don’t overextend yourself by opening up each and every account you’re approved for. Account age is considered in determining your credit score, so new accounts bring down the average age of your overall credit accounts.

Not only that, your credit score is temporarily dinged a few points for every hard inquiry on your report, a step that is necessary to get approved for a loan or credit card. Plus, from a lender’s point of view, lots of open accounts might indicate that you’re desperate for credit and might not have steady finances.

4. Don’t Overuse Your Credit Cards

When you do have a strategic number of credit cards, be sure not to max them out. Again, this makes you look like you’re reliant on credit just to get by.

Your amount owed also accounts for 30% of your FICO score — the second largest category after payment history. The amount you owe compared to the amount of credit you have access to is called your credit utilization ratio.

5. Lower Your Credit Utilization Ratio

If you have a high credit utilization ratio, it means you’re close to maxing out your accounts and could indicate that you might have trouble making your payments in the future.

This is generally a bad sign and can hurt your credit score. Stay on top of your monthly payments right from the start to avoid getting bogged down later down the road.

As long as you’re strategic with your credit products and don’t become reliant upon them for everyday purchases, you’ll remain on track for building a fantastic credit history right from the start.

Start by selecting one or two products that work for you, then make small purchases that are easy to repay each month. You’ll love watching your credit history expand over time. It’s a good idea to monitor your credit reports and check your credit score from time to time to track your progress.

Lauren Ward
Meet the author

Lauren is a Crediful writer whose aim is to give readers the financial tools they need to reach their own goals in life. She has written on personal finance issues for over six years and holds a Bachelor's degree in Japanese from Georgetown University.