That 3-digit number that defines the fate of any loan request – your credit score. Your credit score will help determine if you qualify for a line of credit as well as the interest rate while repaying the loan. So, the higher the credit score, the lower the interest rates will likely be, which ultimately can save you a lot of money on repayment over the life of the loan, especially when buying a home.¹
If you feel like it’s difficult to get any line of credit because you don’t have any credit history for a lender to base anything off of, you are not alone. According to the CFPB (Consumer Financial Protection Bureau), “one in every ten adults does not have any credit history.”² What do you do? How do you get credit when you don’t have credit? No worries, this is your ultimate guide to building your credit from scratch.
First off, the process of building your credit from scratch is not an overnight process, but you can start seeing results early on. Follow these credit building tips below and you will see your credit growing higher.
Build your credit for the first time by:
- Applying for a secured credit card or being an authorized user on a parent’s card
- Make your payments on time and, if possible, pay the balance in full
- Keep your balance low on cards
- Managing student loan payments
- Monitoring your credit report
- Having a co-signer on a loan
Now let’s go into some more detail on how to establish and maintain these credit building tips.
Build your credit with a secured credit card
A secured credit card is a card that is supported by a deposit that is paid upfront.³ We know this may seem strange to open a card for a line of credit that you are providing the money for upfront, but this method allows you the opportunity to show credit worthiness. The upfront deposit is not a loss, as you will get the deposit back when you close the account. A little tip though, try to keep the account open if possible, even if you don’t use it often.⁴ Check with your bank or a local credit union to see if they offer a secured credit card option.
Being an authorized user on a parent’s card
If a secured credit card isn’t the route you would like to take, maybe being an authorized user on your parent’s credit card would be a good jump-start to building your credit. Essentially, you would be gaining credit based on the activity of that card.⁵ However, if the credit history on that card is not very strong, you may see adverse effects on your credit, so please consider this option carefully.
How to make payments to boost your credit score
If you want the key to success when it comes to building your credit, this is it. As briefly mentioned earlier, make your payments on time each month. Setting a reminder on your phone or on your calendar can help with paying on time. Also, setting up auto bill pay might be an option that you prefer. If at all possible, pay the balance in full.⁶ When building your credit, this practice looks very good when your credit history is reviewed. If you can’t pay the balance in full, paying as much of the balance as you can is still very helpful for two main reasons:
- The lower the remaining balance is, the less you pay in interest.
- For building and maintaining your credit, it’s important to keep a low balance and not max out the limit.² It is recommended for best credit worthiness to keep the balance less than 30% of the credit line.⁸
Build your Credit with the bills you already pay each month
You might be thinking, “What about all the monthly bills I pay? Can those help build my credit?” If you currently rent, check with your landlord to find out if they are reporting your payment history to any credit bureaus. If not, with the help of some resources, there are ways to report your monthly rent to reflect your good payment history.⁵ As for your other monthly bills such as cell phone, some of your monthly payments may be reported to credit agencies.⁹ When you sign up for one of those monthly obligations, make sure you have it in your name so you can get credit for the payment history. Most importantly, make sure you always pay them on time or it will hurt your credit.
Things not to do while trying to build your credit
While you are working on building your credit, you don’t want other things to be throwing hits on your credit and canceling out all the work you have done. Here are a few things not to do:
- Be cautious of how many times you have your credit pulled. If you are shopping for a car or looking to take out a loan, do all of your loan shopping at one time within 14 days so it will only count as 1 credit inquiry hit.⁶
- Don’t let your medical bills go unpaid. Most medical bills are not reported to your credit unless they go unpaid, in which case they may negatively impact your credit score.¹⁰ Medical bills are generally unexpected bills that are not typically planned for. Contact the billing office and discuss payment options that work for you, and that way you can pay the medical bill over time and prevent it from being reported as late payments or in collections on your credit.
Can my student loans help build my credit?
Yes, your student loans can help your credit as you credit report shows the payment history and longevity of the loan.¹¹ If you are making monthly payments on time, your credit score will continue to get stronger.
Monitoring your credit report
Finally, this is a very important step – monitor your credit report often. It’s important and easy to monitor your credit. You can sign up through one of the free credit report programs and monitor the activity reported. You can dispute any errors or discrepancies you see by contacting the credit bureau or the creditor directly.⁶ When reading your credit report, you will see a report from all three major credit bureaus – Experian, Equifax, and Transunion. All three bureaus may have different items reported to them or your credit report and score could be largely identical across all three; it just depends on who the creditor chooses to report the activity to.¹
These steps will have you well on your way to an awesome credit score and another step on your home buying journey to your dream home!