How to Build Your Credit When You’re Starting From Scratch

For many, a good credit score is a key to financial freedom. Having credit opens the doors to a lot of opportunities. It also helps you build an economic history that will help you in the long run. Good credit can help you get approved for loans, secure an apartment, or even buy a car. So, what do you do when you’re starting entirely from scratch?

Credit card

There’s a lot of advice out there on maintaining or improving your credit. However, starting from nothing is a whole other issue. Thankfully, there are plenty of ways you can jumpstart your credit journey. This article will discuss several options you have to create and increase your credit.

Get a Credit Builder Card

Applying for and getting a credit card is often the easiest way to build credit. Getting approved without a prior credit history can be tricky, though. Because you have no account to show creditworthiness, some institutions will refuse to approve you for a card.

To avoid that stress, consider applying for a credit builder card. These cards usually don’t require a credit check for approval, making it easier to accept those without credit. Credit builder cards are great starters to help you get used to owning a credit card.

Some allow you to set up automatic payments, so your bill is always paid on time. Just track your spending and always have enough in your account to cover charges.

Become an Authorized User

If being responsible for a credit card isn’t possible, consider becoming an authorized user for someone else. Doing so will allow you to dip your toes into card ownership with less pressure.

The key will be to find someone you trust who also trusts you. Their spending behavior will affect your credit, and yours will affect their ability to pay their bill. So, discuss to hash out all the details before signing anything.

It wouldn’t be a bad idea to develop a semi-formal agreement to establish all the terms from the start. Figure out if you’ll be paying them back for any card use or if they want to give you a spending limit. You should also keep a low balance and always pay on time. Once your credit level reaches a point you think you can maintain, apply for your card. After you’ve been accepted, ask to be removed as an authorized user on the other card.

Take Out a Loan

For some, the idea of using a credit card is just too much, even if it’s not one they own. If you fall in this category, you can still build credit from scratch. It’s just going to cost you.

Taking out a loan is a way to get your credit started. This may also be the best option depending on your circumstances. If you need to borrow money for things like tuition or buying a car, those loans could build your credit; just don’t take out these kinds of loans only because you want to make credit. Be sure a loan is something you need, which will benefit you in the long run.

In that situation, you’ll want to look at credit builder loans. Credit unions or smaller banks often offer these loans. You may also be able to find them offered online.

With a credit builder loan, you make regular payments of your own money. Rather than receiving a sum from a lender and then paying it back, you are in control. The loan amount is typically smaller, which is easier to manage.

That said, your credit won’t grow as much. Before pursuing a credit builder loan, be sure to do your research and speak with a professional. You don’t want to get into any financial trouble.

Pay Bills on Time, Every Time

An easy way to avoid financial trouble and build credit is to always pay your bills fully and on time. Not just your credit card bills, either. Consistently keeping up with your utility, car, internet, and rent payments can also improve your credit.

Payment history makes up a significant portion of your credit score and negatively or positively affects it. It all depends on your consistency of payment.

Consider setting up a monthly budget to know exactly how much to expect in and out each month. Doing so will help prevent overspending and put you in a better position to cover unexpected expenses.

Set up automatic payments to ensure bills are covered thoroughly and on time. Even accounts not traditionally reported to credit bureaus can have an impact on your score. So, it’s best to get in good payment habits for everything.

Add Alternative Information to Your Profile

Those accounts that aren’t usually reported to credit scores can be if you request it in some situations. If you rent, your landlord may be able to register your rent payments. Ask if this would be an option for you. If it is, make sure they’re reporting to all three credit bureaus.

Other accounts that may be added to your report are your utilities. There are tools and services available to report your monthly utility payments. You can then use these to boost your credit score. Of course, this is only an option worth pursuing if you always make your payments in full and on time. Otherwise, they’ll hurt your credit rather than help.

While it may seem like there are more ways to hurt your credit than help it, it’s not entirely hopeless. You can certainly start from scratch when building your credit. You have to find a method that makes the most sense for you, your current financial situation, and your goals. Once you establish good credit habits, you’ll be well on your way to a secure financial future.

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