Building credit from scratch can be overwhelming, especially for beginners who may not know where to start. However, this is a crucial step for financial independence, allowing you to access various credit options. This article offers a step-by-step and easy-to-follow guide for beginners on how to build credit from scratch.
Step 1: Understand the Basics of Credit
One of the first things you need to do to build your credit is to understand the fundamental concepts surrounding this critical financial component. In this case, you have to know what a credit score or report is used for. In essence, a credit score is a number representing your creditworthiness. This number indicator typically ranges from 300 to 850. On the other hand, a credit report is a detailed statement of your credit history, including credit accounts, payment history, and inquiries.
You also need to know the credit bureau and credit builder loans and what they can do for you. A credit bureau compiles your credit information and provides credit reports. Meanwhile, a credit builder loan is designed to help you build credit. However, before you apply for this type of loan, exert the effort to research first. When you explore online, you may encounter a website that provides information and comparisons on several reviewed financial services, including credit builder loans, personal loans, business loans, and credit repair, to name a few. Visit these websites to gain insights into your options, allowing you to make better decisions.
Step 2: Check Your Credit Report
Next, you need to check your credit report. Even if you’re starting from scratch, obtain your credit report from the three major credit bureaus to ensure no errors or unexpected entries. Rest assured that you’re entitled to a free credit report annually from each bureau. In this case, fill out the online form with your personal information if you wish to make a request online.
Alternatively, you can request your credit report through phone or mail. When looking at your credit report, inspect your personal information and check the list of credit accounts under your name, ensuring you recognize all accounts and that there are no unauthorized accounts. While the credit report itself doesn’t include your credit score, understanding your report helps you know what factors influence your score. Consider checking your credit score separately through your bank or a credit monitoring service.
Step 3: Open a Bank Account
Another thing you need to do when building credit from scratch is to open both savings and checking accounts. While this doesn’t directly build credit, it establishes a relationship with a bank and provides financial stability. In parallel, you can also apply for a secured credit card. This card requires a security deposit, which usually acts as your credit limit. It’s an excellent way to start building credit. You can use the card for small purchases and pay the balance in full each month to avoid interest. This will help you create a positive credit history.
Simultaneously, you can also try to become an authorized user. In this case, ask a family member or one of your friends with good credit to include you as an authorized user on their credit card. This can help build your credit history if the issuer of the card reports authorized users to the credit bureaus. However, you must ensure that the primary cardholder uses the card responsibly, as their behavior will affect your credit.
Step 4: Apply for a Credit Builder Loan
Sometimes, you can even apply for a credit builder loan from some banks and credit unions. With this type of loan, the borrowed money is held in a bank account until you repay the loan, at which point you receive the funds. Ensure you make prompt payments to build a positive payment history. For your other loans or credit cards, it will help if you use a co-signer. This is because having someone with good credit as a co-signer can help you qualify for a loan or credit card.
Similarly, you must ensure timely payments to build your credit and maintain your co-signer’s credit standing. Remember, your payment history is the most critical factor in your credit score. Hence, pay all bills on time, including rent, utilities, and cell phone bills. In this case, you can set up automatic payments. This way, you will never miss a due date.
Step 5: Diversify Your Credit Mix
A mix of credit accounts, which may include credit cards and installment loans, can significantly impact your credit score. So, gradually add different types of credit accounts as you become more comfortable managing your credit. However, remember that a hard inquiry is made each time you apply for credit. This can temporarily reduce your credit score, so limit the number of your credit applications to avoid excessive hard inquiries. You can then conduct soft inquiries because checking your credit report or pre-approved offers, which are soft inquiries, do not necessarily affect your credit score.
Step 6: Monitor Your Credit Regularly
Finally, monitor your credit regularly, including your credit utilization ratio. This is the ratio of your credit card balances to your credit limits. You should keep this ratio below 30% to positively impact your credit score. Hence, regularly check your credit utilization and adjust your spending accordingly. Rest assured that you can periodically check your credit reports using credit monitoring services. This will let you stay informed about your credit status and detect errors or fraudulent activity. If you find any erroneous entries on your report, dispute them with the credit bureau immediately. This will have them corrected. Focus on long-term financial health by managing your credit responsibly and avoiding high-interest debt.
Ultimately, you must complete several steps to build your credit from scratch. Apart from understanding the basics of credit, take the time to check your credit report before you open a bank account. You can apply for a credit builder loan and eventually diversify your credit mix. Just ensure to monitor your credit regularly. Remember that building a good credit score doesn’t happen overnight. You must be patient and maintain consistent good credit habits. Rest assured that you will be able to establish your credit in time.
