How to Build Your Credit Starting From Scratch

Without credit, much of the modern world — from mortgages to cell phones to cars — will be limited. With this guide, learn how to build credit from scratch, including the best strategies, credit cards, and loan alternatives.

So you're looking for a new job?

Or perhaps you need a car to get to your new job?

Or maybe you need a bigger home for your growing family?

It could just be that you want a better cell phone plan?

Guess what all these goals have in common?

The answer:

Your credit history.

This overlooked and under-appreciated financial bio about you will affect almost all of your financial decisions, which is why it is so important to learn how to build it up.

Whether you're a new student, recent graduate, or long-time cash consumer finally making the switch to credit, establishing a credit history is crucial in having your future turn out exactly as you imagined.

The problem is that too many people don't pay their credit much attention. According to a 2015 study by the Consumer Financial Protection Bureau, one in 10 Americans — or about 45 million people — have no credit history to their name.

Get ahead of the game. Build your credit early and build it smartly. Below we've put together a guide to help you build credit from scratch — from the ins-and-outs of interest rates to credit builder loans and the best starter credit cards.

Here's everything you need to know to start building credit from scratch

1. Your credit report overview

What is it?

A credit report is to a consumer what a transcript is to a student.

It tracks your financial history and uses a standardized method to calculate how you stack up compared to other consumers.

Similar to a high GPA, a high credit score will open doors in the future as you establish a career and family.

Do Consumers Know the Key Factors Used to Calculate Their Credit Scores?

Who calculates it?

There are three major credit bureaus that track your credit history — Equifax, TransUnion, and Experian.

Each has a slightly different methodology but will provide similar scores that can give you a sense of your credit health.

Better yet, a standardized scoring method all three bureaus use called your FICO address is pretty much all you have to pay attention to because 90% lenders only reference that score when they assess your financial history.

How it is calculated?

A FICO score ranges lowest to highest from 300-850. The average score in 2017 was 695 — the highest average since FICO began tracking scores a dozen years ago.

"The relative strength of the economy, with low unemployment and rising home prices are helping those consumers who were struggling during the great recession to recover financially," said FICO's vice president Ethan Dornhelm.

The first step to building credit is understanding the breakdown of FICO's standardized criteria that shape your score.

FICO Credit Critera

Payment history (35%)

Have you paid all your past bills on time? Late payments over 30, 60, or 90 days can show up on your credit report.

If you don't pay up, your credit card issuer will likely send your bill to a collections agency, which will hurt your score and pocket even further.

Amounts owed (30%)

How much debt do you owe compared to your income? Also known as the debt-to-income ratio or DTI, this number tells a credit issuer if you can safely handle new debt. A high DTI (over 50%) is risky while low DTI (below 35%) shows that a customer can handle new debt.

Length of credit history (15%)

When did you start building credit? Consumers who successfully manage credit over a long period of time are considered a safer risk.

While someone with little to no credit experience is more of an X factor. Still, a long credit history is only good if it's not riddled with late payments and overdue fees.

Credit mix (10%)

What kinds of credit do you have? Types of credit include secured loans, like car loans and mortgages, and unsecured loans, like personal loans, credit cards, and student loans.

Lenders like diversity and consider having a variety of credit better than just one or two types.

New credit (10%)

How many cards have you applied for recently? Even a couple applied for within a week, month, or even year is often a red flag for lenders.

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2. Good or bad, your credit report will shape your life

In today's world, credit is fundamental to a flexible life.

Lenders are everywhere — when you need a car, home, phone — and your score and history is one of the first things they look to when assessing your creditworthiness.

Below we've outlined several areas of life where credit plays a part.


Want a mortgage? Banks will use your credit score to determine how large a loan they'll grant you, what interest rate they'll charge and how many years they'll give you to pay it back.

If you have bad credit, it may be harder to qualify for a mortgage; and if you do qualify, you'll probably pay a higher interest rate because you're considered a riskier borrower.

Car insurance. Do bad credit scores lead to bad driving? Insurance companies use their own data to determine who's likely to ding or total their car.

They believe there's a connection between low credit scores and accidents and will likely charge you a higher premium if you have bad credit — even if you haven't been in an accident.

How Often Do Americans Shop for Car Insurance? (2017)

Landing a job. Employers can look at an employee's credit score during the application process, though they're not supposed to deny a job because of it.

47% of employers surveyed say they check credit scores of new job applicants.

Home insurance. Insurers may be unlikely to issue you insurance if you have poor credit.


There may be a link between bad credit ratings and making large or false claims on a home or apartment.

Water, electricity, and gas. Utility companies regularly check credit ratings on customers. Bad credit may require a person to put up a larger deposit.

Renting: Some landlords will pull a credit report when a new renter expresses interest in renting one of their properties.

3. Interest rates are how lenders deplete your pockets

As we just saw, your credit score could inhibit you from getting a loan or credit card and even spike the interest rate or deposit attached to said loan or card.

The small rate increase might seem like chump change when the bill arrives in the mail, but even a slightly higher rate can cost you tens of thousands of dollars.

With credit, live within the APR range. Many credit cards are advertised with an Annual Percentage Rate (APR) range — say 13.99-24.99%.

It's not that your interest rate will constantly fluctuate between those two numbers.

Rather, the credit card issuer will offer you a final APR within that range, depending on your creditworthiness.

A low score will likely come with an APR toward the high end of the range, and vice versa for a high score.

The same goes for loans, bonds, mortgages, and any other type of credit line a lender might offer you.

Without credit, take the best you can get. As we've mentioned, the good news for those without credit is that you're not alone.

Just like everyone starts without a GPA, everyone starts without a FICO score.

And that means there are established options to help you build that credit.

Nonetheless, at the start of your credit building journey, when it comes to interest rates on credit cards, you'll probably end up with an above average rate — say above 20%.

Over time though, as you pay your bills on time and prove that you're a responsible consumer, your lender can reward you by lowering the APR attached to your card.

4. Five foundation strategies to start building credit

Just because you have no credit now doesn't mean that you'll always have no credit.

Your credit score is a moving target and it's in your power to improve it.

Many people know this but then jump into the world of credit cards without a single thought.

It's important to understand that credit cards are a double-edged sword.

Just as they can help you establish a great credit history, they can also hurt your score if used incorrectly or haphazardly.

To help you get ready for your first card or loan and begin building good credit, we've put together some surefire financial strategies to establish a solid foundation. With these, don't hesitate to jump in right now — today!

Check your credit score. This might seem counterintuitive or like a waste of time if you've never had a credit card. But there are many ways to acquire credit and it doesn't hurt to confirm you don't have a score before you apply for any card or loan.

Plus, considering you get three free credit report checks per year — one from each of the three major creditbureaus — it's a great way to get familiar with the process since you'll want to check your score every fourmonths once you start accumulating credit.

To apply, head over to —the only official and truly free site that provides credit reports.

Create a budget. If you're like most Americans, you likely have a general sense of how much you can spend but never bothered to build out a concrete budget.

The good news is that today's digital world has made it easier than ever. Consider the 50/30/20 rule, the envelope method, or an app like Mint to help you get a grip of your expenses and revenue.

Set up automatic bill pay. If you have trouble remembering dates, you're known to be a scatterbrain, or you're just extremely busy, not having to worry about all of your various bills can save you a bunch of time and, potentially, a costly mistake.

Next time you receive a bill in the mail, call that company's customer service to set up an automatic payment plan.

Pay the utility bills. Building credit doesn't mean using a credit card.

In fact, a great way to start building your score and a sense of financial responsibility is to consistently pay your living bills — that means cell phone, water, heat, electricity, even rent can work toward your credit score potentially.

Make saving a priority. Emergencies happen every day, and can to any of us, even if we might not want to admit as much.

Before you apply for a credit card, it's equally important to establish some savings so you don't end up maxing out the card and killing your score.

Growing an emergency fund is possible despite how tight you might feel your pockets are.

You should have at least $1000 in a savings account, according to Paul Ritz of National Debt Relief.

How Much Americans Have in Savings in Every State? (2017)

5. Three starter credit cards to help you begin building credit

While there are a bunch of criteria to keep in mind when picking your first credit card, the first one you should look for off the bat is whether the card issuer reports to the three major credit bureaus monthly.

To help you build credit as fast as possible, the credit bureaus need as much financial data as they can get their hands on, and monthly reports from your credit card company are the primary ways they learn about your credit management skills.

The three cards below all report monthly.

The first two are secured credit cards, which require an upfront deposit that usually equals the credit limit you'll be granted.

The third is an unsecured credit card, which doesn't require a deposit.

Discover it Secured Card

Annual fee. None

Deposit range (min-max). $200-500

APR. 23.99% (variable)


  • Earn 2% cash back on food and gas up to $1,000 in combined purchases each quarter.
  • Earn 1% cash back on all your other purchases.
  • Earn $1 cash back for every dollar you spend in your first year, automatically.
  • Discover also offers two other cards geared toward students that are great alternatives.


  • Pay a max late fee of $37.
  • The credit range is potentially limited if you're making more money than your credit lets on.

What experts say

Most syndicated review sites highly recommend the Discover it secured card.

J.R. Duren writing for says there are few if any cards as good for people with bad credit.

How to apply. Head over to the Discover it website to apply and learn more.

Capital One Secured Mastercard

Annual fee. $0

Deposit range (min-max). $49-200

APR. 24.99%


  • You are guaranteed an initial $200 credit line after making a security deposit of $49, $99, or $200, depending on your credit.
  • If you can't afford to put down the whole deposit upfront, you can pay it in multiple installments before activating your card.
  • Grow your credit limit if you make your first five payments on time.


  • Pay a max late fee of $35.
  • Even if you can make the deposit, without a checking or savings account you likely won't be approved.

How Much Money Do Americans Have In Their Saving Accounts? (2017)

What experts say.

Beverly Harzog, writing for her personal finance blog, highlights the higher than normal APR of this secured Mastercard as a potential pitfall depending on how you use it.

How to apply. Head over to the Capital One website to apply.

Credit One Bank Platinum Visa Unsecured

Annual fee. $0-99, depending on your credit report

APR. 16.99-24.99%, variable


  • 1% cash back on eligible purchases.
  • $0 Fraud Liability.
  • Credit line increase opportunities.


  • With no credit, you'll likely receive an APR toward the higher end of the range.
  • With no credit, you'll also likely receive an annual fee, which is unlike most secured cards.

What experts say.

According to Josh Patoka at The Finance Genie, one benefit of the Platinum card is that you can see if you pre-qualify before applying.

Eric Frank of emphasizes that with these unsecured cards and the high APR they come with, it's crucial to keep your credit utilization ratio low.

How to apply. You can see if you pre-qualify for the Platinum Visa over at the Credit One Bank website.

6. If you can't afford the secured deposit, a credit building loan might be a good alternative

As you might have noticed, two of the three cards mentioned above require a secured deposit and the third unsecured card comes with a relatively high APR.

What if you don't qualify for the unsecured card, or don't have the funds to put down $300-500 on an upfront deposit for a secured credit card?

A credit building loan might be a great alternative.

How it works. After you're approved for the loan — most range between $500-1000 — the money is deposited directly into a bank account that you can't access.

Instead, you make agreed-upon payments on the loan, typically monthly over a year or so. Once it's paid off completely, you gain access to the loan.

When it builds credit. When you make your monthly payment, the loan issuer — often credit unions, banks, or NGOs — will also report your payment to the three major credit bureaus.

Furthermore, as Kristin Wong points out for

Though a small percentage of your score criteria, diversifying your credit mix will help in the long run.

What's the catch? Beyond not having access to the loan until you've essentially paid for it, most credit building loans charge monthly interest.

That means you'll actually end up paying more than the total loan amount by the time you gain access to the loan.

It's important to read the fine print before you apply, especially when it comes to interest rates.

There are NGOs out there that offer credit builder loans without interest rates.

Who should apply. If you can't get approved for a reasonable unsecured card, or can't afford the deposit required for a secured card (and by afford, we mean not drain your emergency fund!), a credit building loan was literally designed for you.

Average Credit Limits On Secured Cards

Who shouldn't apply. If you need money fast or are in a precarious financial situation, a credit building loan might not be a smart choice.

Amy Bergen, writing for, says understanding the specifics of the loan before you apply is crucial:

7. Building credit takes time and patience, not guts and speed

There's no one right pace to build your credit. It comes down to your financial IQ, job security, expenses, savings, debt, and future prospects.

In other words, the right pace depends on YOU.

That being said, there's no such thing as building credit really fast.

Your credit score comes from the finance reports the major credit bureaus received from all your lenders, and those are reported at most once per month.

Ciele Edwards, writing for The Nest, says it could take a year or more to establish solid credit:

Here are some common Dos and Don'ts to help build credit smartly:

DON'T apply for a lot of cards. There's a misconception out there that to build credit you need a lot of credit cards.

In fact, such behavior will likely hurt your credit.

As was noted in the FICO score criteria breakdown, 10% of your score is based on new credit; lenders see opening multiple credit accounts in a short span of time as a red flag.

DO pay your bills on time and in full. This is the most important thing you can do for your score.

Payment history accounts for 35% of your FICO score so making sure you're on top of your bills is crucial.

And while paying the minimum each month is an option, letting some of the bill roll over will do nothing to help your score while the APR will hurt your wallet.

DON'T max out your cards. Credit utilization — the amount spent over the credit limit granted — is another factor that influences your score.

You want to keep this number between 20-30%. For example, if you have a $1,000 credit limit, you should only be spending $200-300 per month on the card.

There's no reason to wait. By now you should know whether a credit card, credit builder loan or other strategy is best to get you establishing credit.

Just like everyone says your future self will thank you if you start saving for retirement in your 20s — the same goes for building credit.

Start now and don't hit any roadblocks in a few years when you need that car or second bedroom for a new family member.

Everyone starts with no credit – so get building today!

Have you had an experience with no credit?

Let us know in the comments below.

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