How to Build Credit from Scratch

Why Credit Matters

Your credit score determines the interest rate on every loan you take -- mortgage, auto, personal, student. The difference between a 580 and 740 score on a $300,000 mortgage can mean $150+/month and over $50,000 in total interest. Building strong credit before you need it is one of the highest-return financial investments you can make.

Step 1 Become an Authorized User

Ask a parent, spouse, or trusted family member with a long-standing, low-balance credit card to add you as an authorized user. Their entire history on that account can appear on your credit report immediately, giving you instant credit age and payment history -- the two most important scoring factors.

You do not need to actually use the card. The account history does the work. Ensure the account has a low balance relative to the limit -- high utilization on the account hurts your score even as an authorized user.

Step 2 Open a Secured Credit Card

A secured credit card requires a cash deposit (typically $200-$500) that becomes your credit limit. Use it for small, regular purchases -- gas, groceries -- and pay the full balance every month. This builds a payment history in your name, which is 35% of your FICO score.

After 12-18 months of responsible use, most issuers will graduate you to an unsecured card and return your deposit. Look for secured cards with no annual fee from major issuers like Discover, Capital One, or your own bank.

Step 3 Keep Utilization Below 30%

Credit utilization -- the ratio of your balance to your credit limit -- is 30% of your score. If your secured card has a $500 limit, keep your balance below $150 at all times. Ideally, stay below 10% for the highest scores.

Pay your statement balance in full each month. This also means you pay no interest, making the card essentially free to use.

Step 4 Consider a Credit-Builder Loan

Credit-builder loans are offered by many credit unions and community banks. You make monthly payments toward a loan, and the funds are held in a savings account until the loan is paid off -- then released to you. The payments are reported to credit bureaus, building your payment history without you needing to borrow actual money.

Self (formerly Self Lender) and many local credit unions offer these products for $25-$50/month with terms of 12-24 months.

What to Avoid While Building Credit

• Missing any payment a single 30-day late payment can drop a good score by 60-110 points and stays on your report for 7 years
• Applying for multiple cards at once each hard inquiry costs a few points and multiple applications signal financial stress
• Closing old accounts closing accounts reduces available credit and average account age, both of which hurt your score
• Maxing out cards even if you pay the balance, a high utilization at statement close date hurts your score that month
• Co-signing carelessly if the primary borrower misses payments, your score suffers equally; see What Is a Cosigner?

Frequently Asked Questions