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Building Credit

How To Build Credit When You Have None

You can find a lot of bad information online about how to build credit history when you’ve never used any credit before.

I’d like to tell you the best ways to start building credit. Building credit the right way takes a few months but it is easy when you follow these steps.

Building Credit 101: Dos and Dont’s

These strategies also apply if you’re trying to rebuild credit and improve your overall credit score.

Don’t: Become an Authorized Users

Years ago the common credit building advice for college students and young adults with no credit was this: Become an authorized user on someone else’s credit card.

You can still become an authorized user on a friend or family member’s credit card account. But won’t help your credit very much, if at all.

Authorized users of a credit account are not responsible for paying the bill; only the primary cardholder or co-applicant will be responsible.

Therefore, authorized users do not record positive credit history when the credit card gets paid.

Nonetheless, you still hear countless people tell you this is the first thing you should do. They aren’t lying; their info is just outdated. That’s OK 🙂

Don’t: Apply For A Major Credit Card Yet

When you don’t have any credit history, major credit cards like American Express, Discover, Chase, and Citi will deny your application.

But it never hurts to apply, right? Well, actually, it can hurt. The rejected applications can become part of your credit history.

Any time you apply for a credit card, the lender checks your credit. This check shows up as a hard inquiry in your credit file with Experian, Equifax, and TransUnion.

Multiple hard inquiries in a year will lower your credit score, undermining your credit building process before it gets started.

That being said, sometimes a major credit card company will send you a pre-approved offer even if you don’t have any credit. The truth is, you might get accepted.

But I wouldn’t recommend going this route. A secured credit card lets you add positive history to your credit report without risking out-of-control bills.

Get a Free Copy of Your Credit Report

Do: Start With A Secured Card

You could think of a secured credit card as a debit card that builds your credit history.

With a secured credit card the lender does not extend a line of credit. Instead, you make a security deposit which you can spend via the credit card and then pay off.

Yes, you have to fund your own line of credit, but the credit card company reports your payment history to the credit bureaus each month.

So you can start building credit by making on-time payments without risking debt.

This strategy offers several advantages:

  • It’s a Safe Bet: You can’t get into too much trouble when you fund your own line of credit — unlike with a $5,000 credit limit on an American Express or Discover card.
  • You Can Make a Small Deposit: You could make a deposit as low as $200 on your secured card. Remember, this card isn’t designed to enhance your borrowing power. The whole point is to start sending positive credit data to the bureaus so you can achieve a good credit score.
  • Fees Aren’t Punitive: Most secured credit cards charge an annual fee. But compared to unsecured credit cards for people with bad credit, the fees are manageable. Plus, bad credit card accounts have low available credit limits, too.

This should go without saying, but it won’t hurt to remind you: Failing to make on-time payments on your secured credit card each month will hurt your credit.

I recommend paying off the entire balance each month.

Do: Consider Credit Builder Loans

Anyone trying to establish or rebuild credit after bankruptcy should consider a credit builder loan.

This is a loan designed specifically for people building credit for the first time in their lives.

College graduates, people who are newly divorced, and immigrants who are new to the country could all benefit from a small credit builder loan.

Here’s how these loans help first-time borrowers.

  1. Your bank or credit union approves your credit builder loan.
  2. Funds from the loan get dispersed directly into a savings account you don’t access.
  3. Each month the bank withdraws the loan’s monthly payment and reports your on-time payment to the credit bureaus.

With these loans, you’re pretty much guaranteed to make on-time payments month after month — which helps build 35% of your FICO score.

People with no credit history will start to see big increases in their credit scores after a few months.

People with bad credit will make slower progress because their positive payment history has to overcome existing negative credit information.

Do: Consider Applying with a Co-Signer

I saved this common credit building method for last because it’s my least favorite.

When you ask a parent or a friend to co-sign on your auto loan or personal loan, you’re asking that person to put his or her own credit on the line for you.

If you fail to make on-time payments, your co-signer’s credit report will suffer along with yours.

Still, under the right circumstances, this method can help you build your own credit history with the major credit bureaus.

Whether you need a private student loan, car loan, credit card, or personal loan, a family member with good or excellent credit could help you secure the loan by co-signing.

Along with getting access to the money you need, you’ll have a chance to build a positive payment history.

I recommend setting up automatic payments from your bank account or at least putting the loan’s due dates on your calendar.

Getting behind on the payments could strain your relationship with your co-signer.

Elements of a Healthy Credit Score

When you’ve graduated from the dos and don’ts of credit building by getting a secured credit card and a credit builder loan, you’ll have a living, breathing credit file within six months.

At that point, you’re ready to fine tune your credit life so your credit score can soar.

With excellent credit, you can choose loans and new credit cards with lower interest rates and lower fees.

The best credit cards pay you to use them through rewards dollars.

Here’s how to achieve these goals:

Keep That Payment History Perfect

Once you have your secured credit card account open and in use, make the monthly payment, on-time, every month.

Spend your self-funded line of credit and then pay it off. Rinse and repeat.

When I had my secured credit card I used it for only gas. This meant I made regular transactions but never over-spent.

If you already have student loans, rent payments, cell phone bills, and utility bills, pay these bills on time, too.

The FICO and VantageScore models emphasize payment history, especially on credit cards and personal loans.

  • By keeping a perfect payment history, you’re keeping 35% of your credit score in great shape.
  • By making late payments or missing payments, you’d be harming 35% of your credit score.

If you’ve started out with no credit history, you can expect to see credit score increases within six months of making all on-time payments.

If you’re rebuilding bad credit, expect this process to take longer — possibly a couple years.

People will say you can build credit fast. This just isn’t true.

Keep Your Balances Paid Down

Another 30% of your FICO comes from your credit utilization ratio.

This is a fancy term that measures how much of your available credit you’re using month to month.

Someone who has spent $2,500 of a $5,000 line of credit is using half his or her available credit. This credit utilization ratio would be 50%.

Most personal finance experts recommend keeping your credit utilization rate below 30%. I’d go as far as saying 25%.

Once you exceed the 30% threshold, FICO and VantageScore start to lower your credit score.

A credit utilization rate approaching 100% will really start dragging down your credit score.

This rule applies best to revolving credit accounts like credit cards and overdraft protection lines of credit.I

t’s a lot harder to control the balances on installment loans.

Keep a Few Paid-Off Accounts Open

Along with paying down balances, you can help your credit utilization rate by keeping a few unused accounts open.

If you’ve paid off a Visa and plan to close the account, for example, consider keeping the account open but not using it.

Having a card with a 0% credit utilization rate looks really good in your credit history. Once again, your credit utilization rate fuels 30% of your credit score.

Other Ways to Fine Tune Your Credit History

So you know that 35% of your FICO comes from payment history and another 30% from credit utilization. That’s 65%. What about the other 35%?

  • Age of Credit Accounts (15%): Keeping some older accounts open will help here. When you’re first trying to build a good credit history you’ll have to be patient with this.
  • New Credit Inquiries (10%): Like I said above, applying for a new credit card or loan gets recorded on your credit report. Too many hard inquiries in a short period of time can pull down your score.
  • Types of Credit (10%): Keeping a good mix of types of credit will help your credit score. If you already have a student loan and you’ve added your first credit card, you’re already diversifying your types of credit. Adding a mortgage, a car loan, a store card, or a personal loan in the future will help even more.

Protecting Your Good Credit History

The time you spend building credit will pay off well into the future only if you keep a good credit history by protecting your credit profile.

Here’s how:

Credit Monitoring is a Must

Identity fraud is so prevalent in the 21st century. A data breach or stolen credit card could wreck your credit fast.

Financial institutions have increased their security measures in response, but you still have to take responsibility for monitoring your own credit so you can detect problems before they become disasters.

Fortunately, there are many ways to monitor your credit, including several free tools.

First, you can get free copies of your actual credit reports by visiting

Or, you could get a free credit score from apps such as Credit Sesame and Credit Karma which track your VantageScore. (Your VantageScore often resembles your FICO score.)

These apps can alert you about possible fraud. At that point, it’s up to you to take action to freeze your credit and investigate the problem.

If you want more robust protection, the three credit bureaus have subscription-based credit monitoring and identity theft services.

I like TransUnion’s program and have also heard good things about Experian Boost.

Learn More about TransUnion

Remove Inaccurate Negative Items

If your credit report shows a sudden decrease, you may have inaccurate negative items pulling down your credit score.

Sometimes lenders report late payments inaccurately. Or they don’t update Experian, Equifax, and TransUnion when you’ve paid off your balance.

Occasionally people have accounts on their credit report that they never opened because a lender sent in the wrong Social Security number or mixed up some similar names.

You can dispute inaccurate negative items with the credit bureaus, and you can ask the lender to correct the mistake.

Removing inaccurate negative information from your credit report can resuscitate your score quickly. Monitoring your credit reports helps you detect these kinds of problems early.

Keep Credit Card Debt In Check

You learned about good payment history habits with your secured credit card, but a secured card’s low “credit limit” won’t teach you much about self-control.

When you’ve been successful building credit, you’ll suddenly have access to large available credit limits on multiple cards. You could have $30,000 or $50,000 in available credit.

If you dive too deeply into these credit limits, you’ll soon have dead weight pulling on your good credit history in the form of a high credit utilization rate.

Your minimum payments won’t put a dent in your balances, and your credit card issuers will start piling on the finance charges at high interest rates.

At this point you’re vulnerable. A setback like a big car repair or lost wages from an illness means you may have to make a late payment or miss a payment or two. Then the late fees and punitive interest rates kick in.

You see where this is going. Many credit scores have been decimated by late payments that lead to credit card charge-offs and collection accounts.

Avoid overspending!

Your Goal: Credit that Works for You

Now you know the elements of your FICO score and tools you can use to build credit history.

It’s time to use this knowledge by putting it all together.

Building credit is all about building momentum. Every month is a new opportunity for the credit bureaus to receive positive information about you.

Month after month, and year after year, layer by layer, your credit history will grow a little stronger. Then, the components of your credit score start working together, interdependently, in your favor:

  • Keeping a low credit utilization rate requires making on-time payments which boosts your payment history.
  • When you get your credit rolling and keep up the momentum over a couple years, you’ll have excellent credit. People with excellent credit have access to the best financial products with the lowest interest rates, the lowest fees, and the highest spending limits.
  • Higher credit limits can lower your credit utilization ratio which raises your credit score even more.

You can see where this is going. Momentum.

I wish you all the best luck and let me know how it works out.

Also, if any of you want to share your experiences, please do so below!


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