Financial Advisor discussing finances

Building Credit from Scratch

Building credit from scratch can be tricky. Whether you’re a young adult or looking to rebuild credit after a bad setback, building up your credit can be frustrating and confusing. For example – you can’t get credit if you don’t have a credit score, but you can’t get a credit score if you have no credit. It’s the ultimate catch-22. So, where do you start if you’ve never had credit before?

Your credit score is a number that is calculated based on many factors. Some of those factors are: how much you owe in credit card debt, how long you have owed that amount, how frequently you pay off your credit card bills, how many times you have missed a payment, and other factors. These pieces of information are sent by the credit card companies to the major credit bureaus (Experian, Equifax and TransUnion) who determine your score.

With the following steps and strong financial habits, you’ll be on your way to building a solid credit score.

Open a Checking Account

Although opening a checking account won’t help you build credit history, it may help you get approved for a credit card or a loan from your bank. Establishing banking relationships and maintaining a good account standing will show how responsible you are with managing money.

Apply for an Entry-Level Credit Card

Entry-level credit cards that require little credit history are an ideal way to establish your credit history. They often have lower credit limits and an annual fee. Here’s a run-down of the various types of entry-level credit cards you may want to consider:

  • Secured Credit Cards

A secured credit card is an invaluable tool for those looking to build credit. It requires a cash deposit that serves as collateral if you miss a payment. For example, if you want to spend $100 on your credit card, you need $100 in your bank account. This helps you avoid spending more than you can afford to repay. The company or financial institution that you have your secured credit card through, reports this information to the major credit bureaus each month.

  • Student Credit Cards

Whether you’re a freshman in college or on the cusp of graduation day, student credit cards can help you build a successful financial future if managed responsibly. As an added bonus, they often come with promotional offers and rewards.

  • Fixed-Rate Credit Cards

Consumers who choose fixed-rate credits don’t need to worry about interest rate spikes by the Federal Reserve.

Stay Consistent

Lenders like to see a consistent source of income and work history to ensure that you’re reliable enough to make payments on time every month.

Apply for Student Loans

Federal student loans are available to anyone, regardless of their credit score. As you pay them off, your credit score will get a boost.

Consider a Co-Signer

In most cases, lenders will approve a loan for somebody with no credit history if there is a creditworthy co-signer on the application. You can then build your own credit on the co-signed account.  If you default on the loan, your co-signer will be legally responsible for repaying the debt, so this is a significant financial responsibility for the co-signer.

Financial Habits of People with Good Credit

Once you’re approved for a credit card and loan, you’ll need to practice good financial habits to establish and maintain a solid credit score and history. Check out some of those good habits below:

  1. Make 100% of your payments on time.
  2. Avoid opening too many accounts, as it can lower your credit score.
  3. Keep your credit utilization (balance compared to limit) low.
  4. Keep accounts open and active to show credit utilization and payment history.
  5. Check your annual credit reports.

How Long Does it Take to Build Good Credit?

Whether you’re wanting to purchase a home and need a mortgage or are looking to buy a car and need an auto loan, you’re going to need a solid credit score. While you can build an average or good credit score in just a year or two, it may take up to seven years to build an excellent credit score of 750 or higher.

Get Approved for a Credit Card with DFCU

At Deseret First Credit Union, we offer a variety of loans and credit card available. Get approved today!