You probably know that credit scores fall into a range from poor to excellent. But what can you do if you don't have any credit at all? When you're at the very start of your financial journey, you could definitely use a road map!
Luckily, we can offer you a few handy tools to help you build credit from scratch. Read on to find out how to build credit when you have none—because everyone has to start somewhere.
What Is Credit?
Simply put, credit means you can buy goods and services now and pay for them later—or gain access to money and pay it back later. You use credit every time you borrow funds, whether from a financial institution, a local store, or even a family member.
Your credit score measures how likely you are to pay back the funds in full and on time.
How to Build Credit from Scratch
Of course, you can't jump right in and take out a mortgage to buy a home. You have to start with small steps. The easiest way to do this is through a secured personal loan or credit card.
- Your savings are used as collateral for a secured loan or credit card until you've proven you're a safe bet to borrow more money.
- Once you get your loan or credit card, you need to make payments on time each month to start building a financial history with the three major credit reporting bureaus.
Why It's Essential to Have Good Credit
Here's why good credit opens many doors:
- Credit unions and other financial institutions use your credit score to decide whether to approve you for a loan or credit card.
- If approved, your credit score will determine what interest rate you pay to borrow the funds. Higher scores get lower rates!
Easy Ways to Build Credit
Now that you understand how credit works, it's time to take a closer look at how to build credit when you’re starting from ground zero.
Get a Secured Credit Card
A secured credit card means we hold some of the funds in your savings account or certificate account as collateral while you use your credit card to establish a payment history.
Here's how to build credit when you have none:
- Save up money and deposit it in your preferred account.
- Apply for a secured credit card—your limit can be up to 90% of your savings balance.
- Start using your credit card to make small purchases each month.
- Be sure to pay at least the minimum amount due by the due date.
- For best results, pay your balance off in full or use less than 30% of your limit.
Once you've built your credit, you'll be able to get an unsecured card with a higher limit and lower interest rate, plus you get your savings back intact.
Get a Secured Loan
Like a secured credit card, your certificate or savings funds serve as collateral for a secured personal loan. But these two handy financial products work in different ways.
Here's how to build credit with a secured personal loan:
- Deposit money in your preferred type of savings account.
- Apply for a secured personal loan – your limit can be up to 90% of your savings balance.
- Get a lump sum payment into your checking account.
- Make equal payments each month for the duration of the loan term (up to 60 months) until your loan is paid off in full.
- Your monthly payment will include interest.
- Shorter terms mean a higher monthly payment but a lower interest rate, while longer terms mean a lower monthly payment but a higher rate.
- Be sure to make your loan payments on time each month and your credit score will soon start to grow!
When your loan is paid off in full, you'll get your savings back and you'll have a growing credit score, too.
Get a Loan With a Cosigner
Another way to start building your credit from scratch is to ask someone you know to cosign on a loan. If you miss a payment, your cosigner will need to pay on your behalf—so it's a big responsibility for the cosigner.
Your cosigner needs to have a good credit score and debt-to-income (DTI) ratio, with evidence of income and assets. A cosigner can be your:
Smart Credit Management Practices
Applying for a secured personal loan or credit card is only the beginning of your journey to build credit from scratch. Once you get access to the funds, there are smart ways you can help your credit improve—and make sure you don't end up with bad credit.
Make Regular, Timely Payments
This is rule number one. About a third of your credit score is determined by your payment history. It takes a few months for timely payments to start having a positive impact. If you miss a payment, it can take many more months to repair the damage.
Keep Plenty of Available Credit
Another factor in your credit score is your debt-to-credit ratio or credit utilization rate. The more available credit you have, the better it is for your score.
Ideally, you want to use less than 30% of your available credit across all of your accounts. So with a credit card, that's under $300 of your $1,000 limit.
Keep Credit Accounts Open
Let's say you open one credit card account then later you see a better offer and transfer your balance. To boost your credit score, it's a good idea to keep your first account open with a zero balance because it increases the length of time you've held credit.
Get a Loan to Build Your Credit
Are you feeling ready to kickstart your journey toward financial success? Then you might want to consider applying for a secured personal loan so you can get yourself on the map. It's a win-win situation because your savings remain secure while you get access to a cash payment!
Learn about our loans to build credit.