Zero to Hero: How to Build Credit from Scratch

By Money Chutney • Last Updated January 13, 2023

Introduction

Are you tired of being denied for loans and credit cards due to a lack of credit history? Building credit from scratch may appear to be a daunting task, but with the right steps and patience, it is certainly doable.

This guide will walk you through the process of establishing credit, including tips on how to apply for credit, use credit responsibly, and monitor your credit score.

Establishing Credit

The first step in establishing credit is to establish credit. This can be accomplished by obtaining a secured credit card, which is a credit card backed by a cash deposit. You can build credit with a secured credit card by using it responsibly and making on-time payments.

Another way to establish credit is to become an authorized user on another person's credit card account. This can be accomplished by requesting that a parent, spouse, or other trusted individual add you as an authorized user on their credit card account. You will have access to the credit card as an authorized user, but the primary account holder is responsible for making payments.

Using Credit Responsibly

It is critical to use credit responsibly once you have established it. This includes paying your bills on time, keeping your credit utilization low, and not applying for too much credit at once.

On-Time Payments

Making timely payments is essential for establishing and maintaining good credit. Late payments can lower your credit score and make it more difficult to get credit in the future.

Credit Utilization

Credit utilization is the amount of credit you use in relation to your credit limit. It is advised that you keep your credit utilization below 30%. This means that if you have a $1,000 credit limit, you should not carry a balance of more than $300.

Applying for Credit

It's also a good idea not to apply for too much credit at once. Each time you apply for credit, your credit report may receive a hard inquiry. A high number of hard inquiries can harm your credit score.

Monitoring Your Credit Score

It is critical to keep track of your credit score in order to track your progress and identify any errors on your credit report. Each of the three major credit bureaus, Equifax, Experian, and TransUnion, is required to provide you with one free credit report per year.

It is advised to review your credit report at least once a year to ensure that all information is correct. If you discover an error, notify the credit bureau immediately.

Comparison of Different Credit Building Methods

Type of Credit	Requirements	Pros	Cons
Secured Credit Card	Cash deposit as collateral	Good for building credit	Lower credit limits and higher interest rates
Regular Credit Card	No collateral required	Higher credit limits and lower interest rates	May be more difficult to obtain with no credit history
Authorized User	Added to someone else's credit card account	Can build credit without having the card in your name	Not responsible for making payments
Credit Utilization	Keep below 30%	Positive impact on credit score	High utilization can indicate financial strain
Free Credit Report	Available once a year from each credit bureau	Allows for monitoring credit scores and identifying errors	Only one report per bureau per year
Credit Report Errors	A dispute in writing with documentation	Can improve credit scores if errors are corrected	Can be time-consuming to dispute errors

Conclusion

Building credit from scratch may appear difficult, but it is certainly doable with patience and the right steps. Establishing credit, responsibly using credit, and monitoring your credit score are all critical steps in the process. Always pay on time, keep your credit utilization low, and avoid applying for too much credit at once. You'll be on your way to a healthy credit score in no time if you take the right approach.

Frequently Asked Questions