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How To Build Credit from Scratch: The Ultimate Guide

If you want to start building credit for the first time or from scratch, then you have two options to help you establish your credit.

  1. Building credit with a credit card – Involves making payments on time and in full, keeping your balances low, Keeping your accounts active, reviewing options carefully, and using credit cards wisely.
  2. Building credit without a credit card involves using other credit types such as car payment, student loans, or a mortgage. 

This ultimate guide will walk you through both options and cover other important areas like how to build credit with bad credit, credit builder loan, building credit after bankruptcy, best practices for using credit, and much more.

Let’s get started.

How to build credit with a credit card

Using a credit card directly influences the most important factors that go into your credit card score. So, getting a credit card and responsibly and regularly can be the quickest and most effective way to build and rebuild your credit.

Guidelines on how to use credit cards to build credit effectively are;

1. Make payments on time and in full 

Credit card scores measure how you manage your debts. To build credit, your credit record should show consistent and timely debt repayments. 

How about if you don’t have any loans to repay? Use your credit card for regular expenses to help you establish credit without getting into debt.

Make prompt payments, and your credit card issuer will report your payments to credit bureaus. Paying in full also means you won’t have to pay interest.

Your payment history builds up 35% of your FICO credit score. That’s why timely payments are one of the best things you can do to build your credit.

2. Treat your credit card as a debt

It’s nearly impossible to track your expenses without a budget. 

Here is why…

Your bank account balance remains unchanged when you make purchases. Money only moves out of your account the moment you pay your credit card bill.

Therefore, a budget helps you track your expenses whether you use a credit card or not. Always treat your credit card like a debit card ( spend only what you know you’’ manage to pay when the bill falls due)

Sticking to a budget helps you avoid carrying balances and paying high interest.

3. Always keep your balances low

The amount you owe also affects your FICO score, which accounts for 30% of your score. FICO also looks at how you utilize your credit or the amount you owe as a percentage of the available credit.

A higher utilization means you are more likely to miss payments.

Keep your credit card balances relatively low to provide a significant boost to your credit. Aim for 30% or lower.

Keep in mind high utilization still shows even if you pay off credit card debt in full and on time every month. Credit bureaus report the balance on your monthly statement to credit bureaus.

To keep your credit utilization low, consider paying twice a month instead of waiting to get your statement.

4. Keep your accounts active

The longer you use credit cards, the more you become predictable to your lenders. Therefore, the sooner you open a credit card and start using it responsibly, the better.

Keep your accounts open and active. However, don’t just open credit cards to get a sign-up bonus then close them. Avoid shuffling from one credit card to another; instead, find a card that meets your needs and maintains it.

Every time you open a new credit card and close an old one, it lowers your accounts’ average age, which can hurt your score.

The length of your credit history accounts for 15% of your FICO score.

5. Review your options carefully

What if you are just starting with a credit or have made mistakes in the past? It is unlikely a credit provider will approve you for any offer out there.

You need good or excellent credit to qualify for the best credit cards but what do you do if you have bad credit?

Focus on credit cards specifically designed for people with fair credit or bad credit. Their rewards and perks are not as exciting as those top cards offer, but they are a good starting point as you work towards qualifying for better offers.

The issuer checks your credit card score every time you apply for a new card, and such a check can knock off points on your overall score.

Also, multiple card applications within a short time can hurt your score even more. Too many applications signal financial trouble.

6. Use your cards wisely

Using credit cards responsibly will help you build a credit card score without a debt burden. If your ongoing credit card debt or consumer debt causes you to have less than stellar credit, then think twice before using credit cards to build it.

A high credit card limit can be dangerous if you have a history of overspending.

How to build credit without a credit card

In the first section, we learned using credit cards responsibly is one of the easiest ways to begin building credit. 

But how do you build credit when you have none?

Retail credit cards and secured cards that require a security deposit come in handy to help those without a credit card.

But maybe you want a credit card with reasonable fees or just prefer not to use one; you might wonder whether you can still build credit. And how do you make credit when you don’t have one?

Here are some options to consider.

1. Repay student loan

Whether you take a private or federal student loan, you’ll have to repay any amount that isn’t canceled as part of the forgiveness program.

A federal loan may allow you to start making repayments after graduation, left school, or dropped below the half-time status.

Most private loans will require you to start making payments while still in school, although some allow you to defer payments.

Either way, you can start building your credit by making monthly loan repayments while still in school and continue with the practice after you graduate.

Making regular and timely payments on your student loan will help you build credit without a credit card.

2. Use a credit builder loan

What is a credit builder loan?

It’s similar to a secured credit card. After you get the approval, the provider places funds in a locked savings account until you repay the loan. Then you keep the money in the savings account.

Your credit report reflects your repayment history, so payments will boost your credit score as long as you honor your monthly payments.

Check with your financial service providers for a credit builder loan to help you build credit without a credit card. 

For example, Self offers online credit builder loans program that reports your monthly payments to all three credit bureaus. They charge administrative fees to get started and interest on the loan.

2. Repay your car loans or mortgage 

Since all financial service providers report to credit bureaus, making consistent and timely payments on any of these loans will help you build credit fast (even without a credit card)

It only becomes difficult to get approval for any of these without an established credit history. But you can qualify with a steady income and an acceptable down payment.

If you can’t qualify, consider getting someone with good credit to co-sign to boost your chances of approval.

However, read about some risks of cosigning before you consider it an option. The person takes responsibility should you default. Late payments also affect the person’s credit score and yours, derailing your building credit efforts.

3. Watch out for scams

It’s difficult for anyone to build credit without a credit card, making them an easy target for scammers. Beware of advance-fee loans that prey on vulnerable borrowers. They guarantee approval and ask for an upfront payment before extending the loan – which legitimate lenders won’t ask.

Also, payday loans that lure you with cash advances won’t help you build your credit score since payday loan providers don’t report it to the credit bureaus. A payday loan would hurt your credit if you default and the account sent to debt collections.

How to build business credit

Business credit is the ability of your business to qualify for credit or loan. Companies have credit reports and scores just like consumers do. 

Lenders, suppliers, insurance, and other companies evaluate a credit, insurance application, or any business deal.

Building a business credit will help you bring your business plans and aspirations to fruition.

Here is a summary of how to build business credit fast;

  1. Have a business plan
  2. Get incorporated
  3. Establish and nurture a good business relationship with your suppliers and vendors
  4. Get an employer identification number.
  5. Always make payments on time.
  6. Open a business credit card.
  7. Separate your personal and business expenses 
  8. Always monitor your credit.

How long does it take to build business credit?

According to experts,  it can take three or more years to build business credit but some creditors only require one year.

How to build credit with bad credit

Building credit with bad credit can be more challenging than building credit from scratch.

You are trying to convince lenders and credit card issuers that you are very likely to honor future obligations despite the bad credit history.

Know your starting point before you begin to rebuild your credit. Check your credit card score; it may not be as bad as you think. Then begin to make small and achievable goals.

The good news is you can make significant progress fast when you start low. Incremental improvements will give you better financing options than you have now.

Here are some basic strategies you can implement from today and start rebuilding your credit.

  1. Pay bills and any existing lines of credit on time
  2. Keep your credit limit utilization as low as possible – keep it less than 30%
  3. Get a secured credit card and choose an issuer that reports all payments to all three credit bureaus.
  4. Get a credit-builder loan or a secured loan.
  5. Ask someone to add you as an authorized user on a credit card. You don’t have to make any charges or access the account. The primary holder can set spending limits for you, which makes them comfortable to add you.
  6.  If you can’t get access to credit, ask a friend or family member to co-sign a loan or credit card.

How long will it take to rebuild your credit?

Credit mistakes eventually fade into the past. Missed or late payments, collections, and judgments stay on your credit report for seven years. Bankruptcy may linger up to 10 years.

However, you can begin building credit right away and see improvement as you start accumulating positive credit information to counter the big negative ones.

Pick the best strategy or a combination of techniques that can work for you and monitor results.

Building credit after bankruptcy

Bankruptcy can really hit your credit, and the negative mark can stay on your credit report for ten years. 

But it’s possible to rebuild your credit even after bankruptcy with hard work and responsible spending.

Every positive mark on your report raises your credit score. You will be eligible for loans and mortgages with better rates and terms and new credit cards. 

You’re wondering, how do I rebuild my credit after bankruptcy?

Here strategies to help you build your credit after bankruptcy.

1. Determine which accounts are still open and keep up with payments.

Bankruptcy cancels most of your debt, but some debts such as alimony payments and student loans remain open. Pay all loan balances to lower your debt to income ratio, which should boost your credit.

Speed up the process by making more than the minimum payments if you can, and Timely payments will also build your good credit.

2. Avoid changing jobs too often

Job hopping may not affect your credit score directly but influences your creditors. They want to know if your income is reliable and adequate to repay the loan.

Lenders consider your income and history in the past year, your credit score, among other factors. Job stability works in your favor boosting the lender’s confidence in your ability to repay even after bankruptcy.

3. Get a new credit card

Getting a new credit after bankruptcy can be difficult because of high-interest rates and fees. It’s also difficult to get approval.

But it’s critical to get new credit after bankruptcy to prove that you are now a responsible borrower.

It gives you another chance to make timely payments boosting your credit in the right direction. Ensure the new credit issuer reports your repayments to the three major credit bureaus; Equifax, TransUnion, and Experian.

New credit options include; 

  1. Secured credit card
  2. Credit builder loan
  3. Retail and gas cards
  4. Open a small loan

4. Become a cosigner or authorized user

A cosigner on a loan or a rental agreement can help you secure credit after bankruptcy. A cosigner acts as your legal, financial backer in case you don’t make payments.

Mortgages, auto loans, and even rental agreements often take cosigners; however, you are approved for credit under your name. Successful payments boost your creditworthiness and your credit score.

You can also become an authorized user on someone else’s credit card. Payments show up on your credit report as long as the credit issuer reports to the credit bureaus.

5. Make smart decisions when applying for credit

Any new application prompts a hard inquiry on your credit report. Too many of them in short intervals can hurt your credit score. Lenders see it as risky behavior.

Frequent denials for new credit cards could be because their requirements are too high for your current credit profile. Keep watching your credit and understand the issuer’s underwriting standards so that you can apply for credit wisely.

Maybe try a secured credit card or become an authorized user first before you can sign up for another credit card.

Alternatively, sign up for a rent reporting service that reports your rent payments to credit bureaus.

More positive credit histories will increase your chances of being approved for credit cards with stricter requirements with time.

6. Make timely payments with new credit cards

Payment history directly affects your credit score, especially after a bankruptcy.

Stay up to date with your payments by:

  • Enroll in autopay
  • Make multiple payments in a month.
  • Set reminders to make payments
  • Adjust your finances to help you pay off debt every month.

7. Ensure your lenders report your payments to credit bureaus

It’s not an obligation for lenders to report your activity to credit bureaus. 

So always ask them if they do so that your positive activity is captured and raises your credit score.

Ensure to include non-credit-related payments such as utilities, rent, cell phone reported to the bureaus. Not all credit scoring models include such payments in calculating your scores, but it certainly won’t hurt to have some positive payment as part of your credit history.

9. Maintain low credit utilization (less than 30%)

Low balances mean you are using a small percentage of your available credit. The low credit utilization ratio is an indicator to lenders that you can repay what you borrow.

9. Finally, check your credit report to ensure accuracy

Already bankruptcy damages your credit report, but some errors can make it worse. For example, a discharged debt appearing as active or late will harm your credit report.

Dispute errors as soon as possible, and Lexington Law can help you remove bankruptcy-related items from your credit report.

How fast can you build your credit after bankruptcies?

Your credit score may be lower than you’d like until your bankruptcy is discharged.

But, by making payments on time and keeping your credit utilization low, you can start seeing an improvement sooner than you thought. 

You can start without a crest score and earn a credit score record with credit bureaus within six months.

How to start building credit at 18

Why does an 18-Year-Old need good credit?

Because an 18-year-old has plenty of time to build credit without being rushed, instead, it gives you the time you need to access credit and build a personal credit history platform.

So what steps do you need to take? It’s simple…

Get access to credit and use it wisely.

It gives you a springboard into an adult world of personal finance, debt, and spending. It allows you to start building the credit history you need to move to bigger financial obligations such as mortgages.

Getting good credit and practicing good financial habits can kick start the process of getting a personal record. It begins by getting a credit card with moderate spending limits or a small auto loan.

Here’s how can start building credit at 18;

  1. Understand the basics of credit
  2. Open a credit card or become an authorized user. 
  3. Take a “Secured” credit card.
  4. Get a student credit card.
  5. Handle your starter credit cards diligently – pay promptly, and maintain a lower balance.
  6. Branch out and get smaller loans
  7. Always check your credit report regularly.
  8. Keep things simple for now.

The key to building credit for an 18-year-old is getting credit and paying it off as fast as possible.

Best practices for using credit

Whether you decide to build credit starting from scratch. Or rebuild a bad credit history; a bad credit history can sink your score just like not having history at all.

That’s why we need to talk about credit best practices we need to adopt from the word go.

Here we go;

  1. Make monthly payments promptly.
  2. Pay off your full credit card balance every month – to demonstrate good repayment history while avoiding charges.
  3. Always keep your credit utilization low. Avoid creeping too close to your credit limit. It makes lenders think you are high risk.
  4. Avoid opening too many credit cards all at once. It shows your income is not sufficient to support your lifestyle, which is a red flag.
  5. Leave old accounts open. It is tempting to close your account once you pay it off, but that can hurt your credit utilization. Instead, cut up the credit card but leave the account open. However, by all means, close it if it has annual fees and open another with more favorable terms.
  6. Vary your credit card types – Have a good balance between secured and unsecured, installment credit and revolving credit.
  7. Ensure accuracy in your credit card reports. Check them regularly and dispute irregularities immediately.
  8. Always work with a budget and use your credit card responsibly. A budget helps you manage your expenses so you don’t take on more debt than you can handle.
  9. Always shop around for the best terms – fees and interest rates. Lower rates will help ensure you don’t rack missed or late payments on your credit report.

Why should you build credit?

It’s tough to get by in today’s world without credit. That’s why you need some credit history. Credit history or lack of it will affect everything from your job prospects to your address.

  1. Buying a home or renting an apartment – lack of credit history or having a bad one can be a red flag for mortgage lenders or landlords. They want to know they can trust you.
  2. Buying a car – Most people can’t afford to buy a car from savings. Yet, most lenders will pull out your credit history report to determine how much interest rate you will pay on loan.
  3. Getting a job – Some employers will want to know your credit history, especially for positions where you handle money. You can’t take care of other people’s money before you can take care of theirs.
  4. Electricity service – Some utility companies consider credit history before agreeing to extend a service contract or cable agreement.
  5. Small business loan – You might need a financial boost when starting a business, and a lender will be interested in your credit history. New businesses are risky, and a lack of personal credit history is even riskier to the banks.

Types of credit

Keep in mind; credit card score assesses your risk based on several factors, including the kinds of credits you owe.

We have seen the importance of building credit. It’s also important to have the right balance of the types of credit cards. Too much of one type will also affect your score.

  1. Secured credit – Your credit card is secured by some kind of collateral. Just similar to a car loan. You give the lender a lien to your car, and in case of default, the lender seizes your car to recover the money.
  2. Unsecured credit – It’s not backed by any asset, but if you fail to pay, the lender’s only option is to pursue collection against you. The lender may sue you in a civil court or The best way to build credit is to sell your account to a collection agency.
  3. Revolving credit – A lender extends a specific amount of credit you can use when you choose. However, you have to make minimum payments towards your total balance. The minimum balance changes depending on how high or low your balance gets.
  4. Installment credit – As the name suggests, you may want repayments in installments. You may take the money to buy a house or car, but you agree to pay the lender a fixed amount of money every month, plus interest.

You assume full ownership of the item you bought after you make your final installment payment.

Best credit card to building credit

The best credit cards to build credit are those with low annual fees and accept applicants with bad or limited credit, and report to credit bureaus monthly.

Unlike loans, credit cards can also be free to use if you get a card without annual fees if you pay the bill in full every month.

Here are the most popular;

  1. Do you have bad credit? – Discover it® Secured Credit Card
  2. You don’t have a deposit – Credit One Bank® Visa® Credit Card.
  3. After  Bankruptcy– OpenSky® Secured Visa® Credit Card
  4. You want rewards – Capital One QuicksilverOne Cash Rewards Credit Card.
  5. College Students – Bank of America® Cash Rewards Credit Card for Students
  6. No Annual Fee – Capital One Platinum Credit Card

That said, using your credit card responsibly is the best way to build credit. Timely payments add a track record of positive credit history.

The fastest way to build credit

How do you then build credit fast? When you are building credit for the first time, it feels like a slog.

But persistence pays off, and building a good credit history may not take as long as you think if you work hard towards it.

On average, positive changes take between 30-60 days to show up on your credit card report.

Paying bills on time is one of the best ways to build credit. Other factors that affect credit card score include;

  1. The amount you have on your new credit
  2. Credit mix
  3. Credit history, 
  4. Repayment history, and 
  5. Credit utilization.

Pay attention to all these factors but keep in mind that your payment history carries more weight than other variables. 

Paying your current bills on time lays a foundation for a good credit score and a stable financial future.

How Long Does it Take to Build Credit?

It takes about six months of credit activity to establish enough history for the FICO credit score. FICO Score affects 90% of the lending decisions. 1 FICO credit score ranges from 300-850, and any score above 700 is considered a good score. FICO Score above 800 is excellent.

Who to talk to about building credit?

Take a credit builder loan: Talk to your credit union or local community bank to see if they can offer a credit builder loan. If your landlord doesn’t report rent payments to credit bureaus, then consider a rent reporting service to help you build credit even without a credit card or debt hanging over your shoulder.

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