How to Build Credit from Scratch

How to Build Credit from Scratch
Laura Slawny
By: Laura Slawny
Posted: September 27, 2013's popular "How-To" series is for those who seek to improve, rebuild or better understand their subprime credit rating.

Want to earn free rewards or get a car loan? Most lenders require a credit history before they will even consider you for a credit card or a loan.

Building credit is a long-term project, but if you are patient, you can establish yourself as a reliable consumer worthy of the best credit offers and the best interest rates.

Use these simple steps to get started.

1. Apply for credit.

  • Get secured credit.

A secured credit card is a great first step toward building a credit history. You will be required to send in a security deposit and that amount will generally be your maximum limit. Just make sure the bank reports payments to all three credit bureaus so you can build your history.

Notice: A secured credit card is different from a prepaid debit card. A prepaid debit card is not reported to credit bureaus and will do nothing to help your credit.

  • Get retail credit.

A retail credit card can help you build your revolving credit line without too much risk. Your limit is generally small and you can only use it at specific stores, so it’s easier to control spending.

Don’t get more than two cards, as every retail store you apply to will pull your history and that hurts your credit score.

  • Get an installment loan.

Student loans and car loans are types of installment credit lines that come with predetermined installment payments, which are usually paid each month. Having this on your credit report gives you a well-rounded credit history.

Just be sure not to borrow more than you can afford. A student loan doesn’t have to be paid back until after you graduate, which also means it won’t show up on your credit report until you start paying it off.

“It’s important to show you are a

responsible adult who lenders can trust.”

2. Use credit responsibly.

  • Use credit for convenience.

Think of your new credit cards as convenient ways to pay for goods that you would normally pay for in cash. Set money aside every time you use your card so you will have enough to pay the bill at the end of the month.

Never buy anything with the card that you cannot afford.

  • Never take a cash advance.

A cash advance usually comes with high fees and higher interest rates than charging new purchases. Avoid using your credit card to make loans to yourself and you will find it easier to stay on top of bills.

  • Limit your use.

Aim to use no more than 30 percent of your available credit on each credit card to insure a good credit utilization ratio, which is the amount of money you owe each month as a percentage of the total amount you could owe if you max out all your credit cards. This will impact your credit score and interest rates.

3. Manage your accounts.

  • Pay on time.

This is the best way to build credit and the easiest way to lose it if you are late. Pay your bills in full every single month before the due date. This goes for everything – your rent, your utilities, your credit card, everything.

Not all bills are reported to the credit bureaus but they could be, including bounced checks.

  • Be patient.

Applying for new credit cards every time you get an offer in the mail will hurt you because it lowers your average account age. Add new accounts slowly.

Every inquiry shows up on your credit report and the length of your credit history counts, so keep older credit cards open even as you open new ones.

  • Check your credit report.

Use to get three free credit reports every year, one from each credit bureau. To maximize this freebie, space them out so you get one every four months.

Check it for errors, identity theft and unpaid debt you may have forgotten about. Unlike a credit application, looking up your own credit report is a soft inquiry and will not impact your credit history.

  • Keep a steady job.

Lenders want to see a steady paycheck, preferably one that goes up every year or so. Keeping a job for several years looks steady and reliable, whereas someone who job hops may look like a bigger risk.

It’s important to show you are a responsible adult who lenders can trust with their money.

While it takes time to build a good credit history, it only takes a few mistakes to knock your reputation right into gutter. Be patient, manage your finances and act responsibly. Soon you will be rewarded with great credit and low interest rates.

Photo source: