How to Build Your Credit from Scratch - Credit Cards Can Help

For many people, the best place to start building may be with a credit card. But the best credit card to build credit may be different for different people. A retailer card, becoming an authorized user on an existing card, or a secured card all could be viable options for building your credit.

• Retailer credit cards. If you’re just starting out, it may be easier to get approved for a retailer’s store credit card than for a general credit card, though retailer cards usually charge high interest and have low credit limits. You may also be able to get approved for a general credit card that offers a low credit limit and charges higher interest.
• Becoming an additional card member. You can also be designated an authorized user/additional card member on someone else’s card. In that case, the owner of the card you’re authorized to use is solely responsible if you don’t pay your charges. But note: if you’re an authorized user of another person’s credit card, his or her payment habits can affect your score, too.
• Secured credit cards. Another option is a secured card, which requires you to make a security deposit equivalent to the credit limit you’re given. Be sure that the secured card issuer reports to the credit agencies. After several months, your card issuer may review your account to see if you qualify to convert your secured card to a standard credit card.

Another way to build credit from scratch is to take out a loan, but it generally only makes sense to get a loan if you actually need the money to finance a purchase, like an education or a vehicle. Student loans are one option – but only if you’re a student, of course. Auto loans are another option. Some car dealers offer programs for recent or upcoming college graduates, allowing them to qualify for a loan for which they otherwise might not be eligible.

If you aren’t able to get a loan on your own, you may consider getting a cosigner. But as with credit cards, loan cosigners will be liable for the debt if you’re unable to make the payments.

When you’re building credit from scratch, another option is a credit builder loan. After you’re approved for such a loan, you essentially make payments into a savings account that a financial institution sets up for you. You make monthly payments (plus interest) until you’ve paid the entire amount of the loan, at which point you get access to the funds. Because these loans exist to help consumers build credit, your payments will show on your credit report. These kinds of loans are usually offered by small community banks, credit unions, and online lenders.

In addition to using a credit card to help build credit and/or consistently paying down a loan, you may be able to build your credit by leveraging payments you’re already making.

For example, new DIY credit reporting services allow individuals to leverage “alternative data” like utility payments and cell phone payments by linking banking account activity to their credit reports. These options can be particularly useful for individuals who have no credit history or a thin credit file. What’s more, each major credit bureau has announced plans to allow buy now, pay later payments to be listed in their consumer credit files.¹ This could also help individuals build their credit.

Whichever path you choose, it will take at least six months to begin establishing your credit.² But building credit is a long game: the longer your history (assuming you maintain good credit habits like paying on time), the higher your credit score will grow over time – ultimately making it easier to get the financing you need, when you need it, and at more favorable terms.