Building credit from scratch can be challenging, especially if you’ve never had a credit card, loan, or any other type of credit before. However, establishing a good credit score is critical for your financial health. A solid credit score opens doors to lower interest rates, higher loan approvals, and can even affect your ability to rent an apartment or get a job.
In both the United States and the United Kingdom, having good credit is essential for major life milestones like buying a car, securing a mortgage, or getting a business loan. This guide will walk you through everything you need to know to build credit from scratch, offering detailed strategies and actionable steps you can start implementing today.
Why Is Building Credit Important?
Your credit score is essentially a measure of your financial responsibility. Lenders use this score to decide whether you’re a good candidate for loans or credit cards. A strong credit score can lead to:
Lower interest rates on loans and credit cards
Higher chances of approval for mortgages or car loans
Better terms and conditions on rental agreements or utility accounts
More employment opportunities, as some employers check credit reports during the hiring process
Without a credit history, lenders have no way of assessing your risk level, which makes it difficult to access loans or get approved for a credit card. Fortunately, there are plenty of ways to build credit from scratch.
Key Factors That Influence Your Credit Score
Before diving into how to build credit from scratch, it's important to understand the components of a credit score. In the U.S., your credit score is primarily calculated based on the FICO scoring model, while the U.K. uses slightly different systems (Experian, Equifax, and TransUnion). Regardless of location, most credit scores are influenced by similar factors:
Payment History (35%) – Your record of making on-time payments is the single most important factor in building your credit score.
Credit Utilization (30%) – This measures how much of your available credit you’re using. Keeping this ratio low is crucial to maintaining a healthy credit score.
Length of Credit History (15%) – The longer your credit accounts have been open, the more beneficial it is to your score.
Credit Mix (10%) – Having a variety of credit types (credit cards, loans, mortgages) shows that you can manage different forms of credit responsibly.
New Credit Inquiries (10%) – Each time you apply for credit, a "hard inquiry" is made, which can temporarily lower your score if you apply too often.
Actionable Steps to Build Credit from Scratch
Let’s break down the most effective, proven strategies to build credit if you’re starting with nothing.
1. Start with a Secured Credit Card
A secured credit card is a great entry point for anyone without a credit history. These cards require a security deposit (usually equal to your credit limit) to protect the issuer in case of non-payment. Secured cards function just like traditional credit cards and are one of the best ways to start building credit.
Benefits:
Easier approval: Since you provide a deposit, lenders are more likely to approve you even with no credit history.
Credit-building opportunity: Payments on secured cards are reported to the major credit bureaus, helping establish your credit history.
Actionable Step:
Apply for a secured credit card from a reputable issuer, such as Discover or Capital One in the U.S. or Vanquis in the U.K. Make small purchases and pay the balance off in full each month. This will help you build a positive payment history while avoiding interest charges.
2. Become an Authorized User on Someone Else's Account
If you have a trusted family member or spouse with a strong credit history, becoming an authorized user on their credit card can help you build credit fast. As an authorized user, you’ll benefit from the primary cardholder’s good payment history, length of credit history, and credit utilization ratio.
Benefits:
No financial responsibility: As an authorized user, you aren’t responsible for making payments, but you still benefit from the card’s good standing.
Boost your credit score: Positive payment history and low credit utilization will appear on your credit report.
Actionable Step:
Ask a parent, spouse, or close friend with excellent credit to add you as an authorized user on one of their cards. Ensure that they consistently make payments on time and keep their credit utilization low, as this will directly impact your credit.
3. Apply for a Credit-Builder Loan
A credit-builder loan is a financial product designed specifically to help people with no credit history. Here’s how it works: The lender deposits a small amount of money into a secure savings account, and you make fixed monthly payments until the loan is repaid. Once the loan is paid off, you receive the funds.
Benefits:
Credit-building focus: Monthly payments are reported to the credit bureaus, which helps build your credit score over time.
Saving while building credit: The money you pay over time becomes available to you once the loan is fully repaid.
Actionable Step:
Look for credit-builder loans at local credit unions, banks, or online platforms such as Self (U.S.) or Loqbox (U.K.). Commit to making on-time monthly payments to build a positive payment history.
4. Consider a Store Credit Card
Retailers often offer store credit cards, which can be easier to get approved for compared to traditional cards. However, these cards tend to come with higher interest rates, so it’s important to use them wisely.
Benefits:
Easy approval: Store cards are often more lenient in their approval process, making them a good option for credit-building beginners.
Credit reporting: Like secured cards, payments on store credit cards are reported to the credit bureaus.
Actionable Step:
Use your store credit card for small, manageable purchases, and pay off the full balance each month to avoid interest. This will help you build credit while preventing debt.
5. Get a Car Loan or Small Mortgage Loan
If you're able to, taking out a small car loan or a mortgage loan can significantly help build your credit score. These types of loans demonstrate that you can handle large, long-term financial commitments. Since car loans and mortgages are installment loans, they also contribute to having a diverse credit mix, which can boost your score.
Benefits:
Diverse credit mix: Having both revolving credit (like credit cards) and installment credit (like loans) positively impacts your score.
Credit-building potential: Consistently paying your monthly loan payments on time will help build your credit history.
Actionable Step:
If you need a vehicle, consider financing it through an auto loan rather than paying in full. Similarly, if you’re in a position to buy a small property, a mortgage loan can help establish long-term credit. Be sure to make all payments on time to maintain a positive credit history.
6. Pay All Bills on Time
Even if you don’t have credit cards or loans, paying regular bills such as rent, utilities, and phone bills can indirectly help you build credit. Some credit scoring systems, such as Experian Boost in the U.S., allow you to report your utility and phone bill payments to help improve your credit score.
Benefits:
Consistency: Paying bills on time is a signal of financial responsibility, which can help build your score.
Credit reporting: In both the U.S. and U.K., there are services that allow you to report regular bill payments to the credit bureaus.
Actionable Step:
Link your bank account to services like Experian Boost (U.S.) or Credit Ladder (U.K.) to get credit for your utility and rent payments. Set up automatic payments for your bills to ensure you never miss a due date.
7. Keep Your Credit Utilization Low
Once you have a credit card or revolving credit, it’s essential to manage how much of your available credit you’re using. Credit utilization is one of the most important factors in determining your credit score. The goal is to use no more than 30% of your total available credit at any given time.
Benefits:
Improved credit score: Keeping your credit utilization low helps demonstrate to lenders that you aren’t reliant on credit.
Higher credit limits: As you manage your credit responsibly, lenders may offer you higher credit limits, which further reduces your utilization ratio.
Actionable Step:
If your credit card has a $1,000 limit, aim to keep your balance below $300. If possible, pay off your credit card in full each month. Consider requesting a credit limit increase once you've proven responsible usage.
8. Monitor Your Credit Report Regularly
It’s essential to monitor your credit report frequently to ensure that all information is accurate. Mistakes, such as incorrect late payments or unauthorized accounts, can negatively affect your credit score.
Benefits:
Detect errors: Checking your report regularly allows you to catch and dispute any errors before they impact your score.
Track your progress: Monitoring your credit helps you see how your efforts are improving your score over time.
Actionable Step:
In the U.S., you can get a free credit report annually from all three major credit bureaus at AnnualCreditReport.com. In the U.K., services like ClearScore or Credit Karma offer free access to your credit report and score. Review your report regularly, and dispute any errors you find.
9. Avoid Closing Old Credit Accounts
As your credit score is partly influenced by the length of your credit history, it’s crucial to keep old accounts open. Even if you’re not using them, older accounts contribute positively to your score’s longevity and overall credit age.
Benefits:
Credit history boost: Keeping older accounts open contributes to the average age of your credit accounts, improving your score.
Utilization ratio improvement: Having more available credit from old accounts helps keep your credit utilization low.
Actionable Step:
Instead of closing an old credit card, keep it active by using it for small purchases every few months. Be sure to pay off the balance to avoid interest charges and keep the account in good standing.
Conclusion
Building credit from scratch might feel overwhelming, but by following these strategies and committing to responsible financial habits, you’ll be well on your way to establishing a strong credit score. Whether it’s using secured credit cards, applying for a small mortgage, or becoming an authorized user, these steps are all proven methods to help you succeed.
Remember, the key to building credit is patience and consistency. Always pay your bills on time, monitor your credit report, and keep your credit utilization low. Over time, these habits will help you build a strong credit profile that opens doors to better financial opportunities.