Building credit from scratch can be a long and winding road with few shortcuts. Follow these tips to start building a healthy financial foundation.

By: Kathryn Pomroy,

Best ways to build your credit score from scratch

1. Open a secured credit card

If you’re building your credit from scratch, one of the best ways to get the ball rolling is opening a secured credit card; specifically, one that reports to the credit bureaus.

A secured card requires you to make a deposit upfront to open a line of credit. The bank or credit card company holds this deposit in case of a missed payment by the borrower. For example, a card that requires a $300 deposit will typically offer a $300 credit limit. As long as you make on-time payments every month, you will eventually — usually after eight to 12 months — get your deposit back, at which time you can choose to close your account and open an unsecured card.

Some banks, however, will keep your deposit for a couple of months to take care of any stray charges that may appear. The positive activity on your card will be reported to the credit bureaus and help improve your credit score. It is also worth noting that financial institutions offering secured credit cards provide a variety of features and products depending on the needs of the user and their creditworthiness.

One drawback to a secured credit card is the addition of fees to the deposit. This might include application, processing, and annual fees just to have a card. Also, the interest rate is often higher on a secured card. Keep in mind, paying off the balance each month helps you avoid paying high finance charges.

2. Pay your bills on time, every time

Your payment history is 35% of your FICO Score. That makes it the single largest factor impacting your credit history.

If you want to establish a solid payment history, make a few smaller purchases that you can easily pay on time. By not carrying a balance, you also avoid paying interest on your purchases. But if you must carry a balance, making at least the minimum payment on time is necessary.

To avoid missing payments, set up alerts for when your bills are due. Better yet, set up automatic payments if you can do so. That way, you’ll automatically make your payments each month. Just make sure you keep your account information up to date.

3. Open a regular credit card

While a secured credit card is a great way to build your credit from scratch, there will come a time when you want to make the switch to an unsecured credit card.

There are a couple of ways to do this:

  • Your secured card can be migrated to a new credit card
  • You can apply for a credit card and close your secured card

If your bank allows you to convert your secured card to a regular one, ask if you can transfer your secured line of credit to your new unsecured credit card. This way you can avoid having a new credit inquiry, which may temporarily ding your credit score.

If you decide to go for a new unsecured credit card, choose wisely. A no-annual fee card is a safe bet, and you can find no-fee cards that offer flat cashback rates as well. If you decide to try for a lucrative rewards credit card, keep in mind they often require good to excellent credit to qualify and may come with high annual fees. Be sure the rewards you’ll earn outweigh the cost of those fees.

Once you’ve got your card, be sure to make on-time payments and keep your balance as low as possible — ideally 30% or less of your total available credit limit.

4. Consider a store credit card

For some people, opening a store credit card is a good point of entry when building credit. That’s because they may offer more relaxed approval requirements and may approve someone with no or poor credit. But be careful not to carry a balance from month to month — retail cards can carry interest rates of nearly 30%.

Besides a high-interest rate, many store cards have low credit limits. Charge too much too often, and your credit score can go down. That’s because you risk having a high credit utilization ratio. Credit utilization is how much debt you’re carrying versus how much credit has been extended.

For example, if you have a $250 credit limit on your store card, and you put $175 on the card, your credit utilization will be incredibly high at 70%. Keeping your credit utilization below 30% is always recommended when building credit.

5. Become an authorized user

If you’re trying to build credit, sometimes piggybacking on someone else’s credit card account is one strategy to consider. Just be sure this someone else has good credit and a clean payment history. All their good payment behavior will reflect positively on you. But check to be sure that the credit card issuer reports cardholder behavior on the authorized user’s credit report as well. Some do not.

As the primary cardholder is ultimately responsible for any debt incurred, it’s important that you make payments on time every month for any charges you make, or your personal relationship could be at risk.

6. Consider a credit-builder loan

Many local banks, credit unions, and online lenders offer credit-builder loans to help borrowers build up their credit. With a credit-builder loan, the bank typically deposits a small sum of money into a savings account or CD for the borrower, which the borrower is unable to access right away. The borrower has to make monthly payments (plus interest) over a set period, usually six months to two years, before they can receive the funds.

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