Building credit from scratch may seem like a dead end: You need a credit card or loan to start raising your credit score, but you need good credit scores to get approved for credit cards and loans.
So where do you start?
As a financial educator and former NFCC Certified Credit Counselor, I have helped thousands of people answer this question. Believe it or not, there are simple steps anyone can take to build credit from scratch.
Of course, you probably won’t get good credit overnight, but by following a few tips you can speed up the process of earning points. Here you will find everything you need to know.
If you don’t have a credit score yet, it will probably take you at least six months to build your first credit score. According to FICO, the company that invented credit scores, you need both of the following to get your first score:
In other words, you only need to open a credit card or loan to start building credit. Then, after opening an account, there are other things you can do to make sure your scores continue to rise. For example, making your debt payments on time and paying off your credit cards each month will help you maximize your scores.
People often ask me what is the quickest and easiest way to build credit. After spending more than a decade studying FICO scores, reviewing credit reports, and teaching credit score workshops, I can tell you that it takes years or even decades to achieve the perfect credit score of 850. However, there are tricks anyone can use to make significant progress in just a few months.
Whether you have no credit at all or are looking for ways to improve your bad credit, here’s what you can do.
An authorized user is a person who is authorized to use a credit card, but is not the primary account holder. If you’re looking to build or improve your credit, becoming an authorized user is easily the easiest approach.
Being an authorized user on someone else’s card allows you to have that card’s positive payment history on your credit reports, and you don’t have to use the card yourself. You’re also not responsible for making payments, although keep in mind that if the primary cardholder doesn’t pay their bill on time, their credit could also suffer.
Here’s how this strategy works:
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Find a loved one who has good credit. Let them know that you are working to improve your credit score and ask if they would be willing to help you.
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Ask your loved one to add you to one or more of their credit cards as an authorized user. I recommend letting them know that you do not need your own copy of the card and that you will not use the account.
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Have your loved one contact their creditors to add their name as an authorized user. This can be done online or over the phone, and the primary cardholder may only need to provide their legal name and age.
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Once you are added as an authorized user, all account details will appear on your credit reports and will be used to calculate your credit scores.
I personally used this trick when I started building my own credit and it helped me a lot more than I expected. As a result of becoming an authorized user, the length of my credit history (which is one of the main factors used to calculate credit scores) jumped from zero years to 11 years. Over the course of the next year, I was able to open my own credit card and saw my scores increase by about 60 points.
Unlike regular credit cards, you don’t need good credit to qualify for a secured credit card. Instead, you qualify by making an upfront deposit. The card limit is usually equal to the amount you deposit, which can range from $50 to $5,000.
If you don’t have anyone who can add you to their credit card as an authorized user, this is the next option I recommend trying. But keep in mind that some secured credit cards will help your credit more than others. Here’s what you should look for to get the most out of a secured credit card:
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High limits: The higher your limit, the higher your credit score will be (as long as you keep your balance low), so look for the card with the highest deposit you can comfortably pay off.
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Credit reports: Find a creditor who reports account information to all three credit bureaus (Equifax, Experian, and TransUnion). This will ensure that the card has a positive impact on all the different versions of your credit score (yes, you will eventually have multiple scores).
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Graduation option: Choose a secured credit card that “graduates” to an unsecured card after a set number of payments. This will allow you to recover your deposit without having to close the account. Keeping it open will help you build a longer credit history.
A credit-building loan is like a loan in reverse. Instead of receiving loan funds up front and then paying them off, you make monthly payments over a set period (six to 24 months), which are saved in a savings account. Once you finish making payments, you will receive the funds, plus accrued interest.
Since the lender has no risk of losing your money, you won’t need to check your credit to determine if you qualify. But each of your monthly payments will be reported to the credit bureaus, helping you improve your score.
Credit unions often offer loans to build credit. You can use the National Credit Union Administration’s Credit Union Locator to start searching for options in your area.
Read more: 7 Credit Unions Anyone Can Join
A lending circle is a grassroots approach to building credit. With lending circles, you join a small group of people, each of whom makes a monthly payment into a community fund. Then, each person has an assigned month in which they receive all the money in the pot.
For example, if you are in a group of 12 people and each of you contributes $100 a month over the course of a year, there will be one month in which you will receive $1,200.
To make sure your lending circle supports your credit, be sure to look for a financial institution or nonprofit agency that reports your lending circle payments to the credit bureaus. Results will vary, but according to Mission Asset Fund (MAF), a Bay Area nonprofit that hosts lending circles, participants see an average 168-point increase in their credit scores.
Read more: Can you increase your credit score by 100 points overnight?
Lastly, you can try applying for a store credit card, also known as a retail card. These are credit cards that you can only use at specific stores or gas stations.
Why is this the last option I recommend? Although store cards may be easy to qualify for, they have several major disadvantages. According to a report from the Consumer Financial Protection Bureau (CFPB), 90% of retail credit cards have interest rates above 30%. Additionally, they are designed to encourage spending.