How To Build Your Credit From Scratch

Young person establishing credit.

You may be just starting out and want to establish a solid financial foundation and build your credit score.  But how, you ask? We’ve put together 6 simple steps you can take to start establishing your credit now from scratch.

Secured credit cards

Secured credit cards will require a cash deposit which acts as a collateral should you miss a payment. When shopping for a secured credit card, ask if they report to all three of the major credit bureaus which will help you build your credit history. Also, consider if the secured credit cards charge fees.

Student credit cards

These credit cards provide students and younger people without prior credit the chance to build credit. Because they are geared for students, these credit cards provide promotional offers and rewards, alerts and reminders, all to help you stay on track. Keep in mind these cards will probably be a fairly low credit limit and a higher interest rate.

Store credit cards

These credit cards are offered at stores and are usually easier to get. They provide an opportunity for those with little or no credit to build credit history. They most likely will have a high interest rate.

Authorized User on Parent Card

If your parents add you as an authorized user on their rewards credit card, everyone may benefit. Not only will you have a chance to prove yourself and build your credit, but your parents’ rewards and credit may also get a boost. Remember that your parents’ credit is on the line and so making payments are vital to their good credit health.

Cosign on Loan

As someone starting out, you may have better opportunities if you have a cosigner on a credit card, auto loan or student loan. In this case, you and your cosigner are responsible for the loan. To keep your credit and theirs in good shape, you’ll need to make on-time payments.

Mix of credit

Building your credit is gradual and you’ll succeed by taking on various types of credit. Student loans, auto loans, personal loans, secured loans, mortgages, rent, and cell phone contracts are all examples of ways to establish your credit mix.

How do I build credit responsibly?

  • Don’t pay interest fees. Despite what many do by carrying a balance, avoid interest fees by paying off balances each month.
  • Don’t miss a payment. If you are late on a payment, this event will remain on your credit report for a long time and lower your credit score. Even if you can only pay the minimum, avoid missing a payment.
  • Spend within your means. While it’s tempting to spend money on credit cards, make sure you are spending what you can afford to pay off each month. Try to avoid spending more than 30% of your available credit. This is referred to as your credit utilization ratio and keeping this on the low side will help you optimize your credit score.
  • Review your credit report yearly. You are entitled to receive your credit reports each year free of charge. Take the opportunity and make sure things are correct.
Students establishing their credit score.

In conclusion, starting off to build your credit may seem daunting. But use our tips to establish a solid financial foundation. Given time, you’ll be well on your way to great credit.