How To Build Your Credit Score from Scratch – Technologist

Are you completely new to credit scores? It’s actually a pretty important part of your financial life.

Establishing a good credit score and working to maintain it can unlock opportunities for decades to come. It will help you get that first apartment and eventually secure a loan for big purchases like a car or house. And, if your score is high, you’ll even enjoy lower interest rates in the process.

But what if you’re starting from zero? You often can’t get credit because you haven’t had credit.

“The banks make it really hard to build credit,” money expert Clark Howard says. “You apply for it, and they say ‘You’ve got no credit history. We’re not giving you credit.’”

With that type of circular reasoning, it’s understandable that building a credit score from scratch can seem daunting. But it’s achievable with a good plan and some smart decisions. It just takes some patience.

In this article, I’ll walk you through what you need to consider to both get started now and stay on track in the future.

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Table of Contents

• 3 Good Options for Your First Line of Credit
• Understand the Credit Score Game
• Use These 5 Habits To Grow the Score Over Time

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3 Good Options for Your First Line of Credit

To build a credit score from scratch, you’re going to need to establish a line of credit so that the credit bureaus can evaluate your repayment behavior.

This is tough to do, as most creditors are not enthusiastic about lending to “beginners” in the borrowing game. Given this, it’d be unwise to apply for a premier rewards credit card or a new car loan out of the gate. You’re likely to be rejected.

There are a few ways you can get your foot in the door, though. Here are three suggestions to consider:

1. Consider a Credit Builder Program from a Credit Union

One of Clark’s favorite ideas for establishing credit is a credit builder program offered through a local credit union.

“I am a strong believer that the credit unions are the best place to look,” Clark says. “Particularly if you don’t have a leg up and are starting from scratch.”

These programs vary from credit union to credit union, but the general premise is that you leverage your relationship with the credit union to participate in a starter program for your credit. It involves committing a small amount of money to a short-term loan in exchange for them reporting your payment history to the credit bureaus.

Clark says this usually involves getting a low-limit credit card. But others may offer a “credit builder loan” that carries a low, fixed APR for a specific amount of time. An example of one of these programs can be found here.

2. Become an Authorized User on Someone Else’s Credit Card

If you have no credit of your own, you can get your foot in the door by having someone you trust add you as an authorized user to an established credit card account.

Many credit card issuers will add an authorized user to an existing account at no additional cost to the consumer.

Though we usually advise people to protect their social security number at all costs, this is a scenario in which you’ll want to make sure that the credit card issuer records it and starts reporting the activity on it.

“A lot times you’ll hear me say don’t give your social security number out all willy nilly, but this is a time to do it,” Clark says. “If they don’t take the social security number, it doesn’t create a record with the credit bureaus for that authorized user.”

Once you’ve successfully become an authorized user, you will receive a credit card and be able to spend on that person’s account.

Keep in mind that this relationship is a two-way street, though. You’re getting the benefit of their credit history, but you’re also taking the risk of their credit behavior in the future.

You will want to pick a responsible person to join up with in this endeavor. If they don’t pay their bills on time, it could end up negatively impacting your credit as an authorized user on the account.

3. Apply for a Student or Secured Credit Card

This is Clark’s least favorite option of the three, but it may be the best path for those who don’t have access to a credit union or someone they trust to add them as an authorized user.

Many young adults and college students receive solicitations for “student credit cards” that are designed to start a relationship with one of the major credit card issuers.

There’s a reasonable chance for acceptance if you apply for one of these cards, but be careful. There often are high-interest APRs associated with these cards, and many of them can’t wait to ding you with fees at every chance available.

“College students tend to charge too much and pay too much interest. And instead of helping a credit score build, they can actually hurt a credit score by using too much of their available credit,” Clark says.

If you’re certain you can avoid the temptation of spending more than you can afford, Team Clark suggests the Discover it® Student Cash Back Credit Card as a good no-annual-fee student card.

Alternatively, you could also consider a secured credit card. These credit cards require a refundable deposit, and you’re basically borrowing against your deposit each month to establish credit.

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Understand the Credit Score Game

Think of your credit score as your financial report card. But, instead of grading you on how well you can read and write, it’s judging how well you manage money.

While there are many companies grading you, FICO and VantageScore are the most common credit scores you’ll come across. Make sure you have a way to access them for free so that you can check on them regularly. Your score will update monthly.

They score you from 300 to 850. Higher is better. The score is comprised of your behavior in five key categories:

You can read more about how your credit score can improve by focusing on these five areas here.

You don’t have to be an expert on each of these pie pieces, but understanding the rules to the game makes it more likely that you’ll win.

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Use These 5 Habits To Grow the Score Over Time

Once you have established your first line of credit and have studied how the credit scoring system works, you’re ready to start growing your credit score.

The goal should be to reach 760 or higher, as that is generally considered the “top tier” for getting the best rates available for loans.

You can strive for a perfect 850 score, but Clark says stressing about the score once you reach the top tier is mostly a waste of time.

No matter your end goal, I want to remind you that growing a score from scratch takes both consistency and patience. You’re going to have to demonstrate your repayment abilities over many months (and maybe even years) before you reach your desired goal.

Here are some habits that will help get you there as quickly as possible:

1. Always, Always, Always Pay Your Bills on Time

Your payment history comprises the largest chunk of your credit score (35%). And since you are starting from scratch, you’ll want to make sure you get off to a great start in this area.

A late or missed payment is one of the most common mistakes new borrowers make. And it can be a real backbreaker for growing your credit score.

It can take as long as seven years for a late or missed payment to completely fall off your credit report!

Though Clark often advises against using autopay for bills, he does agree that setting it up to avoid a late payment is worth it for people who are at risk of forgetting. You know who you are.

2. Making New Purchases Every Month

If you’re using a credit card to build your credit, you’ll want to make sure you’re active with it.

Even if it’s a small pack of gum at the checkout counter, you need to show some usage on your available lines of credit each month.

Making reasonable purchases and paying them off on time will show credit evaluators that you’re capable of managing credit responsibly. And the more you show them you can do it, the better your score will be.

3. But Don’t Charge Too Much Each Month

Your credit utilization ratio (the percentage of your available credit that you’re using) has a significant impact on your credit score (30%).

Credit score expert Beverly Harzog says keeping your individual account and overall credit utilization totals under 30% is best for staying out of credit score trouble. So, for example, if you have a $1,000 line of credit you’ll want to be sure you keep your spending under $300 in any given billing cycle.

But she says that limiting utilization on all open accounts to 10% or less can significantly accelerate increases to your credit score.

Also, it’s worth noting that FICO says responsibly utilizing a small percentage of your credit is better for your score than not using the credit at all.

4. Accept or Request Credit Limit Increases

Sticking with the credit utilization ratio theme, getting a credit limit increase along the way can really help your ratio.

Oftentimes a creditor will offer a credit card customer with good payment history the chance to increase their spending limit. Saying yes to this offer can help you improve your utilization rate.

For example, if you were able to raise a $1,000 spending limit to $3,000, you could drop your utilization on a $300 balance from 30% down to 10%.

You may need to be patient waiting on one of these increases (and may even have to ask for it yourself), but it can be well worth it. Generally speaking, a credit limit increase should not require a new inquiry on your credit report.

5. Add a Second Line of Credit When The Time Is Right

Once you have started to establish a credit score with your first line of credit, you’ll eventually want to mix a second line of credit into the equation.

This will accelerate your payment history by giving you two different creditors reporting healthy payment activity to the credit bureaus each month.

If you want bonus points on your credit score, try to make it a different type of credit than your first line. Your credit mix (10% of your credit score) relies on you showing versatility in paying on different types of credit.

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Do you have tips for growing a credit score from scratch? We’d love to hear what has worked for you in the Clark.com community.

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