How to Build Your Credit From Scratch

Written by Andrea Coombes
Edited by Carolyn Kimball
Fact-checked by Dayana Yochim

March 13, 2024

If you’ve never used a credit card or taken out a loan from a bank or financial company, there’s a good chance you don’t have credit.

You’ll know for sure if you check your credit reports at annualcreditreport.com. If they come back with a message along the lines of “insufficient information,” that means the credit reporting companies (TransUnion, Equifax and Experian) don’t have any data on you.

The key to building your credit is to give them something to work with. Below, we outline four strategies to get noticed by the big three credit-reporting companies.

Get a secured credit card
Apply for a credit-builder loan
Become an authorized user
Tap into alternative sources of credit

Feel free to tackle these steps slowly, one at a time, or jump in head first, doing all of them at once if you feel like it. But keep in mind that building credit can be a frustratingly slow process — it may take six months or more before your new credit accounts and payment history start to show up.

» Got questions about credit? Read more about what credit is and how it works.

investor.com Quick Tip: Check your credit reports every year

Get in the habit of pulling your credit reports once a year at annualcreditreport.com. Think of it as a wellness check for your financial health. Your credit score is based entirely on what’s in those reports. And yes, that’s plural “reports” — you’ll need to check your report from each of the big three credit-reporting companies: Equifax, Experian and TransUnion. For more on why and how to check your credit, read our story on what credit is and why it matters.

1. Get a secured credit card

Secured credit cards were created for people who don’t have credit or have less-than-stellar credit. Here’s how it works: Because credit-card issuers are nervous about offering a credit card, which is a type of loan (aka credit), to someone whose credit riskiness is a mystery to them (no credit report means they can’t tell how you’ve handled debt in the past), they say, Hey, we’ll give you a credit card if you give us an upfront deposit to cover our losses on the off-chance you don’t pay your bill. You say, Great! and hand over some money that the card issuer sets aside.

You start using your shiny new card to buy things and pay your monthly bill on time every month. After about eight months or so, the card issuer says, Hey, great job! Why don’t you go ahead and apply for one of our regular credit cards, and here’s your deposit back. Et voila! You’re on your way to credit nirvana (full disclosure: there’s no such thing, as far as we know).

Here’s more detail on how secured cards work:

Apply for a secured credit card just like any credit card: Find one you like online (search for “best secured credit cards” to find articles that help you compare features), and then submit an application.
If you get approved, you pay an upfront deposit to the credit card company. The amount varies by card but for most cards, it’s between $200 and $2,000. Usually, but not always, your credit limit — the maximum you can charge on the card — will equal the amount of your deposit. (There are exceptions. For example, the Capital One Platinum Secured card lets you deposit $49, $99 or $200, and have a $200 credit limit.)
Use the card to pay for things. You can buy pretty much anything with your secured card, as long as you don’t exceed the card’s credit limit. The smart thing to do? Simply shift a bill you’re paying anyway, like groceries or gas, to the credit card. In other words, don’t go wild buying things you don’t really need.
After a few months to a year, if all goes well — that is, you pay your bills on time — the card issuer will suggest you upgrade to an unsecured card and will return your deposit.

investor.com Quick Tip: The best way to build credit with a credit card

The best practice when paying your monthly credit card bill is to pay off the entire balance every month. It’s a myth that you need to carry a balance to build your credit. To repeat: You don’t need to carry a balance to build credit. By paying off your balance in full, you avoid getting charged interest. That is a wonderful thing.
Make on-time payments. This is absolutely key to building a strong credit file. Your payment history is the biggest factor in calculating credit scores, and paying on time is the essential ingredient.
If you end up carrying a balance rather than paying in full every month, keep that balance as low as possible. Your credit score will take a big hit if the amount you owe is more than 30% of your credit limit. For example, if you’ve got a $200 credit limit, don’t let more than $60 sit unpaid on the card. And to set yourself up for the best credit score, try to keep your outstanding balance to 10% or less of available credit ($20 or less on a card with a $200 limit). Or take our advice and, if possible, simply don’t carry a balance at all.

Here are some features to look for in a secured credit card:

The card issuer reports your account to all three credit-reporting companies: Equifax, Experian and TransUnion. The whole reason to build credit is so that, next year or 20 years from now, when you apply for a loan, the lender sees what a great credit risk you are (as in, no risk at all), no matter which credit-reporting company they use to check your credit. You want to make sure your credit is getting built at all three of those credit-reporting companies. Many secured card issuers now highlight this feature in their advertising, so keep an eye out for that when choosing a card.
No annual fee. There might be situations where paying an annual fee makes sense, but there are plenty of secured credit cards that don’t charge an annual fee, so be sure to shop around. Why spend money if you don’t have to?
The secured card automatically turns into a non-secured card without closing the secured card account. Ideally, once you’ve proven you’re the perfect person to lend money to, your card issuer will automatically transfer your secured card to an unsecured one so that the original account isn’t closed. Why? Because anytime an account is closed, your credit score is likely to drop a bit. A card without this feature isn’t the end of the world; it’s just a nice perk.
The lowest possible interest rate on purchases. Building your credit doesn’t have to cost you even one dime in interest: simply pay everything you charge to your credit card before your credit card bill comes due. But, if you’re not going to be able to pay off your charges in full, then compare cards based on the interest rate they charge on purchases.

investor.com Quick Tip: The best way to build credit for free

If you're able to...

get a secured credit card that doesn’t charge an annual fee
pay off your balance in full every month (and thus avoid interest charges)
avoid fee-intensive things like cash advances

...then you can build your credit for free!

2. Apply for a credit-builder loan

A credit-builder loan is exactly what its name implies: A loan that helps you build credit. But this type of loan comes with a twist.

Here’s how it works: You apply for a loan from a lender and get approved. This is when, with a regular loan, you’d get your lump sum loan amount. Not so with a credit-builder loan. Instead, you start making monthly payments, and the lender reports those payments to the credit-reporting companies. Only after making a certain number of payments does the lender give you the lump sum. That is, instead of getting your lump-sum loan payment upfront, you have to wait until after you’ve made some or all of your payments. The good news is that, because of the way these loans work, you’re building credit and building a lump sum of savings at the same time.

Usually, you’ll find these loans at credit unions or smaller regional banks, but a growing number of newer financial companies are jumping in here as well, such as Self and SeedFi.

Features to look for in a credit-builder loan:

A lender that will report your account to all three credit-reporting companies, i.e., Equifax, Experian and TransUnion.
Lowest possible fees. Credit-builder loans charge interest and fees, so be sure to compare your options to find the lowest-cost loan for you.

investor.com Reality Check

Credit is more like a roller coaster than a rocket shooting straight up. There will be ups and downs. Some of those downs are out of your control, and may even seem counterintuitive. For example, when you pay off an installment loan (generally, a loan with an end date, like a student loan, car loan, or credit-builder loan) in full, your credit score likely will drop temporarily. Isn’t paying off a loan a good thing? Yes, it is! Yet the credit score algorithms dictate that anytime a credit account gets opened or closed, your score likely will take a hit. Just know that, if you pay on time and use credit responsibly, over time you’ll barely even notice these temporary dings.

3. Become an authorized user

Getting added as an authorized user to someone else’s credit card is a relatively easy way to build credit. And it may be one of the few ways to start building credit if you have no income, because secured cards, credit-builder loans and lending circles generally require proof of income.

Here’s how it works: You find someone in your life who’s really good at paying their bills on time, and uses credit cards. Oftentimes, this ends up being a parent or relative. You ask that person, extremely politely, if they might consider adding you as an authorized user to one of their credit card accounts. Let them know that this doesn’t mean you need to use the card — not at all! This isn’t about you adding thousands of dollars in bills to this lovely person’s credit card. The key here is that simply by being an authorized user, that person’s credit card history gets added to your credit reports.

Some tips to consider:

Make sure the person’s credit card issuer reports authorized users to the credit companies (Equifax, Experian, TransUnion). A quick phone call to customer service will help you confirm. If not, getting added to this person’s account won’t help your credit at all.
Don’t do this with someone who might have trouble paying their bills, because both positive and negative payment history — like late payments — will show up on your report, too.
Try to find someone who has a relatively long credit history, at least two years long if not longer.

Keep in mind that, in the credit scoring models, being an authorized user is weighted less than being a primary user. Being an authorized user is simply a way to get some data onto your credit file.

4. Tap into alternative sources of credit

Innovation is a thing in the financial-services world — there’s probably a new credit product launched every time I finish typing a sentence here. That innovation can be a good thing for people who are looking to build their credit.

Below are some examples of products that might help you on your credit journey. Remember: always, always read the fine print. There may be fees; there are often requirements, such as opening an account and making “qualifying” deposits.

Lending circles

A lending circle is a modern update on a centuries-old practice. In the old-school version, a group of friends or family members gets together and agrees on a dollar amount that each of them will put into the “circle” each month. Say six people agree to contribute $50 every month for six months. Each month, that’s $300 in the pot, and each month, one of the six people in the group gets that $300 to do with what they will.

By the end of the six months, everyone’s put in $300 and everyone’s received a $300 lump sum. For some people, it’s forced savings. For others, it’s quick access to a short-term loan (the first person to receive the lump sum has only contributed $50 at that point).

In the modern revision, you can join a lending circle online with people you’ve never met before. Be sure to look for a reputable nonprofit organization that offers lending circles and — this is important! – reports your monthly payments to the three credit-reporting companies.

You can search for a lending circle with the help of Mission Asset Fund, a nonprofit that works with other nonprofits nationwide to offer lending circles. Click “apply now” on Mission Asset Fund’s website and enter your ZIP code to see if there’s a provider in your area.

Rent and utility payments

Experian Boost. Generally, all those payments you make each month for your rent, phone bill, or utility services don’t count at all toward building credit. Experian’s Boost service aims to change that. You link your bank account and Experian will start counting on-time payments to specific accounts as part of your credit file.

Upsides: It’s free, and can help you build a credit file!
Downsides: You have to link your bank account, and any improvement to your credit file only affects your Experian credit report — not those at TransUnion or Equifax.

Rent-reporting services. A growing number of companies now offer to report your rent payments to the credit-reporting companies. A couple of caveats to consider: Most of these services aren’t free, and there’s some variation in the degree to which credit-score algorithms count rent payments. It might be a wiser move to consider other credit-building options before paying for a rent-reporting service. (That said, there are some pilot programs where nonprofits offer free rent-reporting services, and that could be a great tool in your “build credit” toolkit.)

investor.com Quick Tip: Earning rewards while you build credit

You’ve heard all about the magic of credit card rewards, and you want to get in on that game? OK, no problem. A few secured cards offer rewards, including Discover It Secured Card, Bank of America’s Customized Cash Rewards Secured Credit card, and Capital One’s Quicksilver Secured Rewards card. We detail others, such as Petal 2, Jasper and Upgrade, in our best cashback credit cards story.

Next steps: Continue learning how to build your credit with the next article in our series, or read more of our popular credit card content.

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About the Editorial Team

Andrea Coombes

Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point.

Carolyn Kimball

Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money.

Dayana Yochim

Dayana Yochim has been writing (articles, books, podcasts, stirring speeches) about personal finance and investing for more than two decades, focusing on bringing clarity and the occasional comedic aside to what is often a murky, humorless topic. She’s written for NerdWallet, The Motley Fool, HerMoney.com, Woman’s Day, Forbes, Newsweek and others, and been a guest expert on "Today," "Good Morning America," CNN, NPR and wherever they’ll hand her a mic.

How to Build Your Credit From Scratch

1. Get a secured credit card

2. Apply for a credit-builder loan

3. Become an authorized user

4. Tap into alternative sources of credit

Lending circles

Rent and utility payments

Popular Credit Card Guides

Popular Credit Card Reviews

About the Editorial Team

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