How to Build Your Credit From Nothing

a tablet and laptop on a table displaying credit reports and charts with a document with charts is underneath the devices indicating credit score research.

For many people, the toughest step toward building credit is the first one. Going from having no credit whatsoever to having established credit can seem impossible, but there are multiple ways to get started toward a healthy personal credit rating.

Be Careful

Before you get started, understand that this is a very important time in your credit development. Any major mistakes here will set you back severely and be harder to recover from as you move forward.

Make sure any kind of loan or credit you get is something you can afford. If you are late or miss payments entirely, things will be worse than if you’d never started building credit at all.

Take some time to learn to budget and create a spending plan, so you know how much you can afford to devote to debt payments, then proceed with caution as you work to build credit.

Have a Bank Account

Often the best place to get a loan is from the financial institution that knows you best. Have an account with a bank or credit union and start developing a long-term relationship. As long as you handle your account responsibly, they will be willing to talk to you about borrowing money as well.

If you’re not able to maintain your bank account well—if you are bouncing checks or running up overdraft fees—then maybe you’re not ready for credit. Work to have stable personal finances and prove—to yourself more than anyone else—that you can handle the responsibility of repaying debts.

Look into Credit Builder Products

Secured credit card

With a secured card, you deposit an amount into an account, and are then granted credit that is secured by that deposit. So to get a card with a $250 limit, you deposit $250. The lender is taking no real risk, because they can take the deposit if you fail to repay.

Typically, this secured account would later become a full-fledged credit account, after you’ve proven you can make your payments on time and use the card responsibly. It usually takes six months or a year for the lender to convert the account in this way, at which point they give you back the initial deposit.

Be warned that if you miss payments during this initial period, your credit will be severely impacted. The purpose of the secured account is for you to prove you are ready to handle credit. If you fail to do that, you’ll have a very rough time building credit in the near term.

Credit builder loan

Credit-builder loans are usually small, around $1,000 or less. Like a secured card, they are meant to prove you can repay a debt. In most cases, you don’t even get the money you’re borrowing. The bank holds it while you pay them back. Then, when the loan has been fully repaid, they give you the money.

Some credit unions might have credit-builder loans that are secured loans. Whatever kind of credit builder loan you are looking for, be aware that most financial institutions do not offer them. Start with a local Community Development Financial Institution (CDFI) or credit union when looking for one of these loans.

One way to think of credit builder loans is like building up savings where you also get a good credit history out of it.

Authorized user

It might be possible for an established credit account holder to add you to their account as an authorized user. An authorized user has access to use the credit available like any other accountholder. The user also gets the benefit of any positive credit reporting on the account.

They are also impacted by any negative reporting on the account. So, if the accountholder misses a payment, you’ll do more damage to your credit than if you stayed off the account altogether. Therefore, if you find the account is mismanaged and proves to be a credit score burden, you have the right (as an authorized user) to request the account’s removal from your credit reports.

Do some research before trying this option; not all credit card accounts include authorized users when reporting to the credit bureaus, so you might not get any benefit from using the account anyway. It’s also risky for the primary account holder, as they are legally liable for everything an authorized user does, so take extra care when entering into this kind of situation.

More Resources: How to Build Credit Without Using a Credit Card

Get an Installment Loan

A good starter loan is an old-fashioned installment loan. These are loans for a fixed amount that are repaid on a fixed schedule. They might be from the purchase of a major appliance or furniture, or some other fixed expense.

These days, installment loans are tougher to find. When you buy an appliance, the retailer will typically offer you a store credit card if you want to borrow money to make the purchase. Those just starting to build your credit from nothing, probably won’t qualify for such a card, so you won’t have any luck using this method.

The idea here is that the item you're buying secures the installment loan. If you fail to repay, the lender can repossess the appliance, furniture, or whatever you bought. Retail credit cards are unsecured by nature, so they’re harder to get.

If you can still find an installment loan that is small, fixed, and secured by real property, it’s a good option for building new credit.  Before proceeding with the installment loan, be sure and confirm they’ll report your credit history to the major credit reporting agencies.

Open Your First Credit Card

Special care should be taken when establishing your first credit card. As you’re just building your credit, you likely won’t be able to get a card with great terms. This is especially tricky because we suggest you keep your first card for many years to increase your credit history. But if your first card is given at not especially good terms, aren’t you saddling yourself with a bad account forever?

The answer we’ve often recommended is a gas station credit card. The idea is to use the card regularly in a small, controlled way, and pay it off in full every month. That way, it doesn’t matter how high the interest rate is—as long as you pay it off before the grace period ends, you’ll never pay any interest.

Learn More: What to Consider Before Getting Your First Credit Card

It’s also important to use your first card regularly. If you go too many months without any activity, the account won’t benefit you or help you build your credit score. A gas station card checks every box; it’s a good starter card that you’ll use regularly, and should be able to pay off before any interest is charged. Even if you don’t pay it off entirely one month, you’re not likely to get into insurmountable debt just from the local gas station.

Consider Your Second Account

After you have established your first credit card and are using it responsibly, start thinking about your second account.

Your best bet will be to make it a different kind of loan. A small auto or personal loan to complement your credit card account will show you can handle different kinds of loans and establish a healthy credit mix, which can be a nice boost to your credit score.

Building credit the right way takes time, but with good repayment activity, you can create a solid foundation for your financial future and a healthy credit report.

Learn more from our FIT (Financial Instructional Training) Academy, where you can learn about budgeting, credit reports, and using credit wisely. If you’ve already tried to build credit and something has gone wrong, we can help with a credit report review or debt counseling session.

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined in 2003 and has over two decades of experience in the industry.

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