Building Credit from Scratch: A Beginner’s Guide to Getting Started Safely

Building your credit score may seem like a tricky task, but only if you don’t know where to start. The higher that three-digit number is, the easier it becomes for you to access some financial products, get loans with better interest rates, and even rent an apartment.

A credit score shows just how financially responsible you are, that’s why whenever you need to make an important decision regarding your finances, your credit score will always come into the picture. There are numerous ways you can build credit by paying your bills on time or getting a credit card early on. Let’s review some of them more in-depth.

Try Using a Credit Card

When we need extra money fast, we can either borrow online or pay with a credit card. When it comes to building your credit score, using a credit card is a fast and straightforward way to do that.

Still, it’s a double-edged sword because you need to pay off the debt each month so it doesn’t accumulate and harm your credit score instead. Some late payments can stay on your credit report for years, that’s why you can opt for a secured credit card that’s meant only for building your score.

This type of credit card is backed by a cash deposit you make beforehand. The minimum and maximum amount of money you can deposit differs, although many card issuers would require you to deposit at least $200.

Other than that, these cards work as any other credit cards and you can use them to make payments and buy the things you need. Once you’ve built enough credit, you can be eligible to get an ordinary credit card that, as a rule, has more benefits and better interest rates.

If you do opt for this method, make sure your payment reports go to TransUnion, Equifax, and Experian, the three credit bureaus responsible for keeping track of your credit score. If the company you choose reports to all three of these bureaus, then you’ll be able to build a more cohesive credit history.

How to Build Credit Without a Card

If using a credit card to build a credit history seems a bit risky, there are other ways you can make those digits go up. 

Apply for a Credit-Builder Loan

Credit-builder loans, also known as ‘starting over loans’ due to their purpose, can help you grow your score and, in the future, allow you to apply for a bigger loan or get better interest rates. As a rule, you can get this type of loan at online lending companies and smaller banks. The amount of money may vary, but usually, the sum is no more than $1000 with up to 24 months to pay off the loan. Naturally, you don’t need to have a high credit score to get approved for this type of loan. Still, you need to have a solid financial status and proof that you can make regular payments.

How Does This Loan Work?

You need to keep in mind that a credit-builder loan operates in reverse. Usually, when you borrow money, you get the sum first and then pay it off over time.

With this type of loan, you give the lender a deposit equal to the full amount of money you borrow, and then on top of that, you make monthly payments till the debt is closed. After that, the borrower will get their deposit back. This system is created to mitigate possible risks for the lender.

Who benefits from credit-builder loans?

• People with a thin credit file.
• “Credit invisible” people without a credit score.

When you shouldn’t apply for this type of loan:

• You have missed payments and your credit score is low as a result of that.
• You already have a credit score.
• You need to get the loan amount back quickly (usually it takes no less than 6 months if you make payments regularly).

Get Credit for Paying Your Bills

Think about using special services that will make sure that your on-time rental payments become part of your credit score. Not all rent-reporting services are free and some can cost you a fee. You should always consult with a landlord to see if they can come up with some options. The three biggest credit bureaus – TransUnion, Equifax, and Experian – will include this type of information in credit reports, but you need to deliver it to them first.

If you’re a tenant, you can use:

• The Positive Rent Payment Program that can report your payments.
• Self – a service that reports your payments to the major credit bureaus (no fee).

Paid services you can use:

• RentRedi.
• Boom.
• Rock the Score.
• Rental Kharma.
• Rent Reporters.
• Piñata.

Keep in mind that some of these services may still need confirmation from your landlord before they can report your payments.

Conclusion

In this article, we’ve touched upon a few methods that can help you build credit from scratch. First, you can start using a credit card and make regular purchases with it, but the downside is the risk of accumulating unpaid debt.

You can also use a secure credit card to safely boost your credit score. Next, you can apply for a credit-builder loan. This specific type of loan is especially beneficial for people with no credit history whatsoever.

While it may certainly help build your credit score, you’ll need to deposit the full amount of money beforehand and then still make monthly payments on time. You can also get credit for paying your bills by using rent-reporting services.