3 ways to build credit from scratch


You know what, building credit from scratch is like the chicken-and-egg conundrum. Because most of the credit unions will ask about your credit score before offering you a credit card!

Yes, you heard it right! But how can you establish good credit without using a credit card? In short, if you don’t have any credit score, it can be very tough for you to build a good credit score.

But how will you show a history of responsible repayment if no one is ready to offer you credit?

That’s why we have listed some of the best possible ways about how to build credit from scratch!

Let’s go!

1. Opt for a secured credit card

What is a secured credit card?

Most likely, this is the first question that comes to your mind after hearing this. Well, opting for a secured credit card means building credit with a credit card. Yes, you heard it right!

To take out a secured credit card, you need to make a cash deposit upfront. Usually, the deposit amount is gonna be your credit limit.

You will receive your deposit back while closing your account. But let me tell you, my friend, secured credit cards are not meant to be used forever. It will help you to build a good credit score so that you can be eligible for an unsecured card.

An unsecured credit card comes with a higher credit limit and better benefits. And that too without a deposit.

So, it’s always advisable to choose a credit card with a nominal annual fee. And make sure it reports to all three major credit bureaus, i.e, Equifax, Experian, and TransUnion.

2. You can take the help of your mom and dad

Yes, you can talk to your parents if they are willing to lend you a hand by making you an authorized user of one of their credit cards; or if either of them is ready to be a co-signer of your loan.

A. Authorized user

Let’s say, your parents make you an authorized user on their rewards credit card. This way, both you and your parents can reap the benefit.

You will get a chance to build your credit. And at the same time, your parents can stash some reward points on every dollar you spend.

However, your parents are also responsible to pay off the amount which you have spent. And missing a payment means it’s gonna hurt both of your credit scores! So, you should be wise enough while swiping your credit card.

B. Co-signer

Are you applying for a credit card? Or, are you applying for a student loan?

If your parents consider to be the co-signer of your loan application, there can be a high chance of qualification.

But in this case, you and your parents will be responsible to pay off your loan. By the way, are you under 21?

If yes, then according to the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 , either you should have an adult co-signer or you need to show your income proof so that the credit card issuer gets assurance that you can repay any money you spend on your credit cards!

3. Opt for a credit-builder loan

Perhaps, one of the best ways to build credit is opting for a credit-builder loan. Usually, it is offered by smaller financial institutions like credit unions and community banks. And guess what?

You won’t need any credit score to qualify for a credit-builder loan. But you need to have enough income to make payments.

You need to deposit the money, you want to borrow, into a bank account held by your creditor. Then you have to pay off the principal along with interest every month on time. You have to pay off your loan on time within a period of 6 to 24 months. And you won’t have the access to your money, which you paid, until the given time frame is over! But your creditors will report your payment history to the credit bureaus.

Once you pay off the loan in full, you will get back your money into the credit card account.

4. Opt for a store credit card

Do you go shopping at any retailer?

Then you must have encountered those offers of signing up for their store credit card. You might be surprised to know that online retailers are showing a pop up offering their credit card to you!

Well, opting for a store credit card can help you to save about 20% on a day’s purchase. But it has certain setbacks like:

  • Usually, store credit cards have a higher Annual Percentage Rates (APRs) than regular credit cards. A 2019 CreditCards.com survey has found that the average APR of store credit cards is about 27.52%; whereas, regular credit cards have an average APR of about 17.27%.
  • In most cases, store credit cards have low credit limits. At least, to start with! But you can get a higher credit limit if you use it wisely.

However, it’s comparatively easier to qualify for a store credit card. Thereby, it can be a good option for you to establish a good credit history!

Let’s say, you have started building your credit! But at the same time, you need to maintain good habits that can help you to build a decent credit profile!

But how so?

Well, your credit score comprises of some of the following parameters which you need to take care of, like:

5. Payment history:

“Pay your bills on time”

Probably, most of the financial advisors suggest this! I would say, it’s the no.1 factor that drives your credit score. Payment history accounts for 35% of your credit score. It shows how reliable you are by paying your bills on time! So, no matter what, pay off your bills on time, preferably within the grace period! Thereby, you don’t have to shell out more by paying interest.

6. Credit utilization ratio:

This is the percentage of your credit limit you are using. And it’s the second biggest factor that influences your credit score. I would suggest you keep your credit utilization ratio under the tab of 30%.

If your credit utilization ratio is high, it reveals that you are overspending. And it might be a worrying fact for your creditors.

7. Credit history length and inquiries:

A long credit history means you have been maintaining a history of on-time payments. But if you apply for a new credit card, it’s going to generate a hard inquiry on your credit report.

So, it’s always better to keep your oldest credit card open and charge it for small amounts. And avoid applying for or opening up new cards as they can slash your average account age.

I hope you have learnt some of the ways of how to start credit from scratch after going through the article. So, don’t wait! Start building your credit asap. And most importantly, be wise enough while using your credit card!

Wish you all the best for a stable financial life ahead!