What Is the Best Way to Start Building Credit (If I Have None)?


Credit is an essential part of the U.S. economy, and yet, one in five Americans has none at all. According to a May 2015 study published by the Consumer Financial Protection Bureau, 26 million Americans have no credit report or credit score, and an additional 19 million have thin and unscorable files. In all, 45 million adult consumers do not register on a credit scale.

In addition to public necessity,

  1. Review the Five Factors of credit scoring. The first step on the path to credit strength is education. Understanding how credit is scored will help you create a strategy for success. The five factors that determine your Experian, Equifax and TransUnion FICO scores include:
    • Payment history (35 percent). Do you pay your bills in full and on time? The answer to this question is likely to determine your credit score.
    • Debt and credit utilization (30 percent). Once you have successfully opened a credit account, utilization is an important skill to master. The amount owed vs. your total credit limit allows the credit bureaus to determine your risk level. In other words, how heavily do you rely on borrowed cash? Do you carry a balance from month to month? The equation for credit utilization is individual and cumulative. For example, if you have a $2,500 balance on a card with a $10,000 limit, then your ratio is 25 percent. If you have a card with a balance of $3,000 and a $15,000 limit, your ratio is 20 percent, but your overall ratio is 22 percent:

$5,550 total debt/$25,000 total credit limit=22 percent cumulative credit utilization

For best results, maintain individual and cumulative ratios of 25 percent or less.

  • Credit length (15 percent). A lengthy credit history can only help your efforts. Consider long-term use before opening your first credit account. Keeping original lines open and active is the best way to bolster your score.
  • New accounts and inquiries (10 percent). Credit scoring is dynamic, and it’s important to keep applying for new accounts as the years pass to illustrate your role in the process. Talk to a professional about this category to create a useful strategy.
  • Diversification (10 percent). The credit elite have experience will all types of accounts: mortgage and auto loans, personal loans, credit cards, education debt and even home equity loans. While you don’t need each to succeed, maintaining a healthy mix of installment and revolving accounts is essential. Learn more about the differences here.
  1. Begin using credit. Easier said than done, right? If you have been denied for credit before, applying for a new line probably seems daunting. Don’t get discouraged; there are plenty of ways to establish first-time credit, including:
    • Authorized user-ship. Ask an experienced family member to add you to their line of credit as an authorized user. This strategy allows you to establish an account on your credit reports and reap the rewards of a relative’s payment history.
    • Secured credit cards. Qualifying for a secured credit card is easy for first-time credit users. Like a debit card, a secured credit card must be loaded with cash before use. Unlike a debit card, payments are reported to the credit bureaus, allowing you to illustrate a positive payment history. As a bonus, some secured credit cards may be converted to standard revolving accounts after a period of time.
    • Department store cards. Consider retail options as you begin building credit. Frequent shoppers benefit from opening an in-store credit card. Application requirements are generally less strict, allowing users with little credit to qualify.
    • Student loans. For most, funding a college education is impossible without scholarships, grants or loans. The latter is a good way to establish a credit history while working toward a better future. Federal and private loans will appear on your credit reports even before you begin the repayment process. Choosing the right option is critical for continued credit health. Download our Student’s Guide to Credit e-book for more details.
  2. Establish a savings account. Although income is not a factor in credit scoring, liquid assets are a key ingredient in financial stability. Establishing an emergency fund helps you prepare for life’s surprises, e.g., medical expenses, home and auto repair, unemployment, etc. These preparations will prevent you from relying on credit to make ends meet.

The bottom line: Building credit takes time and patience, but the rewards are worth the effort. Don’t wait to begin your journey. Good credit will open doors in your future.

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