Building credit from scratch can be tricky. Whether you’re a young adult or looking to rebuild credit after a bad setback, getting your hands on credit can feel a little like the chicken and the egg. You can't get credit if you don't have a credit score, but you can't get a credit score if you have no credit. It’s the ultimate catch-22. So where do you start if you’ve never had credit before?
With the following steps and strong financial habits, you'll be on your way to building a solid credit score.
How to Build Credit from Scratch
Open a Checking Account
Although opening a checking account won’t help you build credit history, it may help you get approved for a credit card or loan from your bank. Establishing banking relationships and maintaining a good account standing will show how responsible you are with managing money.
Apply for an Entry-Level Credit Card
Entry-level credit cards that require little credit history are an ideal way to establish your credit history. They often have lower credit limits and an annual fee. Here’s a run-down of the various types you may want to consider:
• Secured Credit Cards
A secured credit card is an invaluable tool for those looking to build credit. It requires a cash deposit that serves as collateral if you miss a payment. For example, if you want to spend $100 on your credit card, you need $100 in your bank account. This helps you avoid spending more than you can afford to repay. Secured credit cards report information to the major credit bureaus each month.
• Fixed-Rate Credit Cards
Consumers who choose fixed-rate credit cards don’t need to worry about interest rate spikes by the Federal Reserve.
Lenders like to see a consistent source of income and work history to ensure that you’re reliable enough to make payments on time every month.
Consider a Co-Signer
In most cases, lenders will approve a loan for somebody with no credit history if there is a creditworthy co-signer on the application. You can then build your own credit on the co-signed account. If you default on the loan, your co-signer will be legally responsible for repaying the debt, so this is a significant financial responsibility for the co-signer.
Financial Habits of People with Good Credit
Once you’re approved for a credit card and loan, you’ll need to practice good financial habits to establishing and maintaining a solid credit score and history.
- Make 100% of your payments on time.
- Avoid opening too many accounts, as it can lower your credit score.
- Keep your credit utilization (balance compared to limit) low.
- Keep accounts open and active to show credit utilization and payment history.
- Check your annual credit reports.
How Long Does it Take to Build Good Credit?
Whether you’re wanting to purchase a home and need a mortgage or looking to buy a car and need an auto loan, you’re going to need a solid credit score. While you can build an average or good credit score in just a year or two, it may take up to seven years to build an excellent credit score of 750 or higher.
Get Approved for a Credit Card with DFCU
At Deseret First, we offer a variety of loans and credit cards available. Learn more by visiting our website.