How to Build Credit From Scratch: Getting Started
You probably know that major life purchases like a home or car require credit. But you may not know how to start building credit. It can seem like a vicious cycle: You need access to credit lines to get good credit, but no one will give you a credit line if you don't already have good credit.
Believe it or not, everyone who has credit now was once a beginner and right where you are now. You can build credit from scratch, just like they did. Here are tried and true ways you can get a smart start on building credit today.
Secured Credit Cards
With a secured credit card, you put an amount on deposit greater than or equal to the credit line. For example, a credit card issuer might request a $300 deposit for a $300 credit line. This way, the bank has the money for the balance of your charges on deposit at all times.
These credit cards may also give eligible clients the ability to graduate to an unsecured card. Secured or not, credit cards report to the three major credit bureaus – Experian, Equifax and TransUnion – helping you build your credit when monthly payments are made by the due date each month.
Student Credit Cards
If you're enrolled in college, credit card companies want to help you build credit. This means you may be able to get a credit card without a cosigner or even a security deposit. While you may be more likely to get accepted for a student credit card compared to a non-student card, your credit line may be lower and interest rates slightly higher to balance out the risk of issuing credit to someone without a good credit history.
Lease an Apartment
Consumers can now explore making their rent payments count by paying their rent through Rental Kharma or RentTrack. These two companies and others like them can potentially partner with your landlord or property management company to give you consumer credit for your on-time rent payments. The companies act as an intermediary between you and your landlord: You pay them, and they pay your landlord. If you're already renting, explore this option (and its associated fees) and ask your landlord whether they're willing to enroll to help you build your credit profile.
Smart Credit Building Tips
- Charge wisely: A smart way to start building your credit history is to ensure that you never charge more than you can pay off in a single month.
- Remember, balances matter: Did you know that your credit score is partially based on how much credit you have available? This means that if you have two credit cards with $500 limits but only $200 available across both cards, your score will lower. Try to keep month-to-month balances you can't pay off at no more than 30 percent of your credit limit per card.
- Make payments on time: A single payment made 30 days late can have a significant impact on your credit score. Set reminders in your calendar for five days before any payment is due so you can schedule a payment online. On-time payments mean an easier road to building credit.
- Budgeting: A financial plan provides you with a road map that can help you keep track of your spending so you can reduce your debt, grow your savings, and improve your credit health. Once you have a solid plan, you can feel confident that you’re spending and saving in a way that aligns with your priorities.
- Credit application quantity and frequency: Credit cards can help you establish a credit history and reward your spending with cash and other perks. But proceed with discipline. Debt that’s racked up and not paid back can negatively impact one’s credit score.
- Monitor your credit: A credit report shows how you’ve used credit in the past, and your credit score predicts how you’ll use it in the future. It’s wise to stay on top of both so you can watch for errors and see the results of your credit-building efforts. You can request a free report from each of the three credit reporting bureaus (Experian, TransUnion, and Equifax) each year. And some financial institutions, such as KeyBank, offer their clients free access to their FICO® Score.
Everyone has to start somewhere. Begin building credit with these tips today and put your future financial plans within reach.