If you’re starting from scratch with no credit history, don’t worry, you’ve got options. You can build credit from nothing by getting a secured credit card, becoming an authorized user on someone else’s card, or applying for a joint or no-credit-check loan. The key is to make on-time payments and keep your balances low. These simple habits help build a strong credit history that opens the door to better financial opportunities.
Maybe you’re fresh out of school, recently moved to the U.S., or just never needed credit until now. Whatever your situation, building credit doesn’t have to be hard; you just need the right tools and a little consistency to get started.
What is a Credit Score and How Does it Work?
A credit score is an assigned number that represents your credit history and financial risk. Understanding the credit score system and how credit is calculated is essential to building a better score.
Your credit score is composed of data collected by a credit bureau. The three major credit bureaus (TransUnion, Equifax, and Experian) collect and maintain credit information. That information is processed using a credit scoring model, such as FICO, that generates a credit score.
Factors that Affect Credit Scores
There are various factors that can affect credit, and they all have a different impact. Here’s a credit score breakdown of the FICO credit scoring model:
- Payment History — Your payment consistency makes up 35% of a FICO Score. Avoiding late payments can improve your payment history and credit.
- Amounts Owed — The amount of outstanding debt you have makes up 30% of a FICO score. Lowering your credit utilization can help increase credit scores.
- Length of Credit History — The amount of time you have managed credit counts for 15% of a FICO Score. Avoid closing accounts, even if you no longer use them.
- New Credit — The frequency of applying for new credit accounts makes up 10% of FICO Scores. It’s best to avoid applying for new credit unless absolutely necessary.
- Credit Mix — The variety of credit accounts you have makes up 10% of your FICO Score.
Achieving a good credit score is entirely possible by improving your credit history and establishing better financial habits. Keep in mind that credit score improvement takes time, so you may not see immediate results.
The Different Types of Credit Scoring Models
Now that you know how a credit score is calculated, it’s helpful to understand the different types of credit scoring models that lenders and credit card companies use.
| Credit Score Model | Score Range | Score Categories | Used By / For |
| FICO Score 8 | 300–850 | – Poor (300–579) – Fair (580–669) – Good (670–739) – Very Good (740–799) – Exceptional (800–850) | General lending (most common model) |
| FICO Score 9 | 300–850 | Similar to FICO 8, but treats medical debt less harshly and includes rental history | General use, some banks and lenders |
| FICO Auto Score 8/9 | 250–900 | Custom model for auto loans | Auto lenders |
| VantageScore 3.0 | 300–850 | – Very Poor (300–499) – Poor (500–600) – Fair (601–660) – Good (661–780) – Excellent (781–850) | General lending, uses trended data |
| VantageScore 4.0 | 300–850 | Similar ranges to 3.0. Uses trended data (key balance and payment data for the previous 24 months) | Newer model gaining adoption |
Building From Zero: A Quick Checklist
When getting started with credit building, keep in mind that the best credit building tool for you depends on your financial goals and budget.
These are some easy first steps to build credit from zero:
- Secured Card — A secured card is a great credit starter kit that can also help you build an emergency fund from a small security deposit.
- Authorized User — Becoming an authorized user on a credit card can help you build credit fast.
- Credit Builder Loan — A credit builder loan can help you improve your credit history and financial management skills.
- Report Rent/Utilities — Reporting your timely rent and utility payments to a service company could help you build a stronger score.
Start With a Secured Credit Card
Various credit card companies offer secured credit cards. A secured card works similarly to an unsecured credit card, but your credit limit is an upfront security deposit that you provide. To open a secured card for beginners, you must provide between $200 to $2,000. Once your credit card account is established, you can use your card to make everyday purchases.
You can build credit securely by paying your monthly bill on time and keeping your credit utilization low. But keep in mind that an unpaid balance may accrue interest from an APR that can range between 13.99% to 24.99%.¹
Become an Authorized User
An authorized user is a person who is added to an existing credit account. Authorized users can receive their own credit card to make purchases, however the primary borrower is solely responsible for the debt. The management of the account will reflect on the authorized users credit report, so it’s important to only share credit history with a parent or trusted partner.
Apply For a Credit Builder Loan
A credit builder loan is a savings-back installment loan that can be helpful for new borrowers or low credit borrowers that need help rebuilding their credit score.
Applicants must choose a starter loan amount, typically between $300 to $1,000. Unlike a traditional loan, the money is not provided upfront. Instead, the lender puts the loan amount into a savings or secure bank account. The borrower makes monthly payments, which consist of the principal and interest, until the loan agreement is complete. Once you finish payments on the credit-building loan, you will gain access to the full amount minus any interest and fees.
Timely payments made on this type of beginner loan can help you build credit over time. Lenders report loan payments to the three major credit bureaus, so it’s critical to avoid any late payments.
Report Your Rent and Utility Payments
There are alternative credit methods available if you don’t want to apply for a new loan or credit card. For example, you could build credit with rent if you continuously pay on time. By using a rent reporting service, your monthly rent and utility payments on non-traditional credit reports could boost your credit score.
You will have to sign up for a service and link an active checking account for payment confirmation. While most rent reporting service companies charge money, there are free options available, such as Experian Boost. Experian Boost can help raise your credit score with cell phone, utilities, rent and insurance bills.
Credit Building Mistakes to Avoid
These are a few common credit mistakes people make when trying to get a good credit score. If you want to avoid any new credit user pitfalls, consider avoiding these mistakes:
- Ignoring Credit Reports — It’s important to monitor your credit reports. The three credit bureaus all provide free credit reports every 12 months. You can request each credit report through the AnnualCreditReport website.
- Not Paying Bills on Time — Late payments can further decrease your credit, so it’s important to make on time payments. A late payment can appear on your credit report, and will remain for up to seven years.
- Only Making Minimum Payments — Only paying the minimum on your credit card can increase your principal over time, which affects your credit utilization rate. A high utilization rate will further decrease credit. Paying more than the minimum can help you avoid credit traps and avoid excess interest.
- Taking on Unnecessary Credit — Applying for another loan or credit card can lower your credit score and result in unnecessary debt. If you need emergency cash, consider asking for a credit limit increase or borrowing from friends and relatives.
- Closing Credit Card Accounts — It’s in your best interest to avoid closing credit card accounts, even if you don’t use them. Account closures can affect your credit utilization and credit history, especially if it’s an older account. However, sometimes it’s better to close if there’s a high annual fee or security concerns.
- Applying for Multiple Credit Cards at Once — If you need emergency cash, it’s best to only apply with lenders that offer prequalification decisions. Applying with too many lenders within a short period can make it harder to build credit.
FAQ
How can I get a credit card with no credit history?
To obtain a credit card with no credit history, consider applying for a secured credit card, which requires you to make a cash deposit that serves as your credit limit. This minimizes the risk for lenders while allowing you to build your credit profile.
What types of loans can help build credit?
To build credit from nothing, consider starting with a few types of loans that can positively impact your credit score. Secured credit cards are an excellent option, as they require a cash deposit that serves as your credit limit, allowing you to make purchases while demonstrating responsible repayment behavior.
How often should I check my credit report?
You should check your credit report at least once a year to ensure that all the information is accurate and up to date.
How can rental payments contribute to credit history?
When tenants consistently pay their rent on time, these payments can be reported to credit bureaus through services that specialize in rental payment reporting. This positive payment history can enhance an individual’s credit profile, demonstrating reliability and financial responsibility.
References:
- Everything you need to know about getting a secured credit card │CNBC
- Building credit from scratch │Consumer Financial Protection Bureau
