How do I build credit from scratch?

Building your credit for the first time can feel a little like the chicken and the egg. To build a good credit score, you’re going to need to take out a loan or get a credit card, but you can’t qualify for a loan or get a credit card without some credit history, right? So what do you do?

[Visual of a man and woman riding toys in the shape of a chicken and egg. The man is wondering “Loan or credit card?” and the woman is wondering “Credit history?”]

Let’s start with a bank account. You don’t really need a long credit history to open a checking account at your local bank. In fact, you may have one already. Even though a checking account won’t necessarily help you build credit history with the bureaus, that account may help you get your first credit card or loan from the same provider. You see, if you already have a history of doing good business with the bank, they know you and value that business. That existing relationship can carry some weight when it comes time to get your first line of credit.

That is a good first step, but if that’s still not enough, here are a few other things to consider. Some banks offer credit cards for folks who want to establish, strengthen or even rebuild their credit. It’s called a secured credit card, because you secure the amount you borrow with a security deposit. In other words, you provide collateral, by depositing money in an account with the bank, something the lender gets to apply a portion of, or all, should you default on the loan.

[Visual of a man offering his piggy bank, titled “Security Deposit,” in exchange for a secured credit card being offered by a large hand. He’s saying, “Collateral = Credit Line”]

Your credit line is equal to the amount you deposit. You won’t be able to touch that money, or use it to pay off your balance, and you’ll still have to prove to the bank that you have sufficient income to pay the credit card.

[Visual of a checklist: Confidence and credit are checked off.]

The good news is that the bank will be more confident that you’ll pay them back, even without great credit, allowing you to build or rebuild your credit. Since you’ll be using your first card to build your credit, you’ll want to make sure that once active, your lender will report all those on-time payments to the bureaus before you apply.

[Visual of a newswoman reporting from a backdrop labeled “First Credit Card.” She’s holding a paper that reads “Lender,” and the cameraman is holding a camera labeled “On-time payments.”]

Most banks and credit unions do this, but some retail store cards, for example, don’t. So, make sure to check ahead of time, and if your payment history won’t be reported by the card issuer, you may want to keep shopping for a card.

[Visual of a man striking out on a pitch labeled “Hard inquiries.”]

Also, don’t apply for a bunch of different cards if you keep striking out. All those hard inquiries and declines aren’t going to help you build a score. Keep in mind – a secured card is different from a prepaid card. A prepaid card allows you to load the card with a cash amount ahead of time to spend later. Prepaid cards are great for people who need a Visa or Mastercard to make a purchase, and can be a terrific gift idea, but they won’t help establish credit.

Another way to build credit is to see if there’s someone who might be willing to co-sign a loan with you- this can be any adult who is credit worthy, including your parents or spouse. When someone co-signs a loan, you get the benefit of their good credit history, and this may help you get approved. You can then build your own credit with a good history of payment on the co-signed account. Now, whoever co-signs the loan for you is taking on a really big financial responsibility. They’ll be on the hook for the debt if you run into trouble, so it’s not something you should ask for lightly.

[Visual of a man and woman rocking a cradle labeled “Credit,” while they’re saying “Careful management” and “Good habits.”]

When you do get credit extended to you, it’s important to keep managing it carefully, even after you’ve built a history. You’re doing the right thing by getting off on the right foot.

[Visual of a woman knitting a yarn labeled “Credit history” into a scarf labeled “Credit score.”]

Now, make sure you keep those good habits the rest of your credit life. This will help you build a long, positive credit history that will eventually result in a really good credit score.

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