By Allan Halcrow | American Express Credit Intel Freelance Contributor
4 Min Read | December 22, 2022 in Credit Score
Baking from scratch usually requires many ingredients. But there’s a simple recipe to build credit from scratch, with just two main ingredients: payment history and time.
Whether you’re a student just beginning to build your financial profile or a new resident trying to establish credit in the U.S., ultimately you need to prove to lenders that you can handle your financial obligations. The best way to do that is to consistently make your credit card, loan, or other payments on time. And to build up good credit from scratch, you’ll want to focus on payments that are tracked by the three major credit-report bureaus, Experian, Equifax, and TransUnion.
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.
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.
To build credit from scratch you’ll need to establish a payment history that shows on your credit report and maintain it for at least six months. It’s often fastest and best to use credit cards to build credit, but two other vehicles also can be key: loans and alternative data sources such as utility and rental payments.
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