5 Steps to Build Your Credit from Scratch

5 Steps to Build Your Credit from Scratch
Justine NelsonOctober 1, 2020
Key Takeaways:
  • Building good credit can save you money on everything you buy.
  • Start by applying for one credit card and paying it off each month.
  • Pay all bills on time and check your credit score regularly.

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Good credit can be a strong foundation for your financial future. It can help give you access to a mortgage, more favorable credit card and personal loan rates, and even lower car insurance premiums. But in order to have good credit, you need a good credit score. And to get a good credit score, you need to have a good track record of behavior that credit agencies reward. What if you don’t have that good track record? You’ll need to learn how to build your credit from scratch.

Credit agencies score you on how well you interact with existing debt. And according to myFICO, the factors they use to calculate your score (in order of importance) include: payment history, how much you owe, length of credit history, application for new credit, and type/mix of credit.

Whether you are rebuilding credit after filing bankruptcy, starting to work on your credit after a divorce, or building credit for the first time, here are five steps you can take to improve how you’re scored in all the key factors so you can build your credit score for your future.

Step 1: Open a credit card under your name

One way to build your credit from scratch is to open a credit card under your name. If you have never opened a credit card before, you might find it hard to get approved initially. It might be even tougher right now, as many credit card companies are enforcing tighter credit approval restrictions, while the unemployment rate is so high.

To help overcome these limitations, try opening a credit card with the bank where you already have a savings or checking account. If you have banked at the same establishment for a long time, you will have a history of transactions and payment behavior that underwriters can reference when they consider whether to issue you a card.

The credit limit you’re given may not be very high at first, but you can ask for a credit limit increase after a few months of using the card and paying monthly billing statements responsibly. After a year or two, you could apply for a credit card that has more perks, like cashback or travel rewards.

Step 2: Use your credit card responsibly

After opening a credit card in your name, you can’t build your credit unless you manage it properly. Even during a recession, it is important to learn and apply healthy credit card habits so you can lay the groundwork for a better credit score. Consider this credit routine:

  • Pay off the card balance each month. By the due date, pay off your credit card balance in full.

  • Use a credit card that has no annual fee. To help save money, look for a credit card that has no annual or monthly fees. Check the terms and conditions before you apply.

  • Limit what you put on your credit card. If you have a history of misuse or are new to credit cards, minimize credit card purchases. Start by making small and consistent purchases like gas. Don’t use your card as a layaway plan for a major purchase.

Starting small is a great way to take those important baby steps toward responsible credit card usage and help build your credit at the same time.

Step 3: Stay current on existing bills

Did you know that a history of on-time payments on rent, mortgage, utilities, or existing debt can improve your credit? The more you can stay current on existing bills, the more you can build your credit score.

Falling behind on a payment isn’t simply a matter of forgetfulness. In a survey by the Bureau of Consumer Financial Protection, 50% of respondents said they fall behind on bills because the bill is due before they receive their paycheck. There are a few easy ways to avoid this situation. First, work with your creditors to move your bill dates to coincide with your payday. Second, proactively look up how much you’ll owe (for instance, on your utilities bill), and set the money aside in a separate savings account when you get paid. When the bill is due, transfer the funds.

Remember, the biggest contributor to your credit score is your payment history. The more time you log making on-time payments, the more likely you are to see your credit improve.

There’s no magic bullet to building credit. It all revolves around living within your means so that you can pay your bills off on time.

Step 4: Minimize your credit applications

A good rule of thumb is to only apply for credit that you need. Each time you apply for new credit, the creditor will do a “hard pull” inquiry of your credit, which may lower your score.

Another way to avoid hard inquiries while you learn how to build credit from scratch is to keep your oldest credit card open and continue using it. Because 15% of your credit score is made up of the length of your credit history, the longer you can keep a card open, the more it can help your score.

Instead of applying for another card yourself, you could become an authorized user on someone else’s credit card. An authorized user is a secondary account holder on the same credit card as the primary user. The benefit of becoming an authorized user is that you don’t have to use the card in order to have it reported to your credit profile. This could be a good strategy if you’re new to credit, but just make sure you do it with someone who uses the credit card responsibly.

Step 5: Consistently check your credit scores and credit report

To make sure all your hard work is paying off and you are building your credit score, you’ll want to check both your credit score and your credit report. There are three major credit bureaus that track your credit score: Equifax, Experian and Transunion. It’s important to check your credit report with all three, because errors in the credit report can impact your credit scores.

In addition, review accounts that are associated with each credit bureau and identify any mistakes. After checking your scores, review your credit report, which outlines credit activity and your current credit situation. Information that is misrepresented on your credit report can change your credit score. You can check your credit report for free using Annual Credit Report. Finally, review your own credit card statement. Some card issuers will provide your credit score for free in their monthly statements.

It takes time

In the end, there is no easy way to build your credit. It will take time, effort, and a willingness to stick with it. Freddie Huynh, Vice President of Data Optimization for Freedom Debt Relief — who also spent 18+ years at FICO — gives this advice: “There’s no magic bullet to building credit. It all revolves around on living within your means so that you can pay your bills off on time. Over time, if you build up a track record of responsible credit behavior, you will be in a better position for a better credit score.”

Building credit starts with managing debt

If you have struggled with credit history and debt in the past but want to work toward better financial health, it really starts with managing your debt. There are several ways to get debt under control, including a debt relief program. A Freedom Debt Relief Certified Debt Consultant can walk you through your options so you can start the road to debt recovery. Get started now.

Learn more:

Achieve financial control. How much debt do you have?

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Or speak to a debt consultant  800-910-0065