Mortgage Advice

How to Build Credit When You’re Starting From Scratch

April 3, 2014

Whether you’re applying for a credit card, purchasing a new car or trying to buy your first house, your credit history will play a heavy role in your ability to obtain financing. If you haven’t established a credit history, lenders will be unable to accurately assess your creditworthiness and thus less likely to approve you for a loan. But don’t worry, there are plenty of ways you can start building your credit and prove to lenders that you are financially responsible. Here’s how to build credit when you’re starting from square one:

Check your credit report
If you want to start building a strong credit history, the first thing you need to do is check your credit report for any errors or fraudulent activity. You can get a free copy of your credit report at Once you’ve reviewed your report, you will have a better idea of where your credit stands and what range you want to be within. Most lenders require a minimum credit score of at least 620, however the higher your score is, the better.

Get educated on how credit scores are determined
In order to build a strong credit history and get the best score possible, you need to know how your credit score is determined. Credit reporting agencies use the following five factors to determine your credit score (ranked in order of importance):

  • Payment history (your ability to make payments on time)
  • Outstanding debt (how much you owe on accounts)
  • Length of credit history (your average account age)
  • Type of credit (revolving credit, installment loans, etc.)
  • New credit inquires (new applications for credit)

Build credit wisely
As you can see, there are a number of things that can impact your credit score. Combined, these factors measure your ability to use credit responsibly. You can also use this information to build your credit prudently. The following tips can help you demonstrate your ability to build and maintain credit wisely:

  • Apply for a secured credit card. The hardest thing about building credit when you’re just starting out is that it takes credit to get credit. If you’re unable to get a credit card, ask your bank about applying for a secured credit card. When you apply for a secured credit card, you will be asked to make a security deposit with your bank in return for a “credit card.” This card will have a credit limit equal to your security deposit and you will be able to use it just like a normal credit card. Each month, the bank will issue a statement that you will be required to repay, and your credit activity will be reported to credit bureaus. This will help you build your credit so you can apply for other types of credit in the future.
  • Become an authorized user on someone else’s account. Ask your parents or spouse if they can add you as an authorized user on their credit card. As long as they use credit responsibly, you’ll reap the benefits of having their credit history transfer to your credit report.
  • Utilize your utilities. Contrary to popular belief, you don’t have to have a credit card to start building credit. Many utility companies are starting to report account activity to the credit bureaus. If you have one or more utilities in your name, ask your utility provider to report on your payment history. This can help you build your credit and demonstrate to lenders that you are financially responsible. 
  • Show a diversity of credit. Once you begin building your credit, you’ll be able to apply for other types of credit. Try to have a mix of revolving credit (credit cards) and installment loans (student loans, car loans, etc.) on your credit report. Having a diversified credit report will demonstrate to lenders that you are able to manage a variety of debt.
  • Ask a family member to co-sign for you. If you need help acquiring an installment loan, such as a car loan, consider asking your parents or spouse to co-sign for you. If they agree, their credit history will be considered during the approval process. If you ask someone to co-sign for you, make sure you can afford to make the monthly payments. If you make your payments on time, your credit score will benefit, and theirs will, too. But, the contrary is also true.

A word to the wise
Just because you have credit, doesn’t mean you can abuse it. It’s important to pay your bills on time and only purchase what you can afford to repay. Try to keep your credit card balances low and never allow your balances to rise above 50% of the total available credit limit. If you follow these tips, you’ll be well on your way to building a strong credit history.

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dave-sullivanWith more than 20 years of experience providing state-of-the-art credit reporting solutions to financial institutions and mortgage lenders, Dave Sullivan has established his reputation as an industry expert. In addition to serving as the Marketing Director for Credit Technologies and on the Board of Directors of the MMLA, Dave enjoys providing credit tips on his weekly video blog,