How to build credit from scratch

Building credit from scratch can seem like a daunting task, especially if you have little to no credit history. However, with the right strategies and a disciplined approach, you can establish a solid credit foundation that will benefit you in the long run. Good credit is essential for obtaining favourable loan terms, renting an apartment, and even landing a job in some cases. Here are some practical steps you can take to build your credit from scratch.

Understand the Basics of Credit: Before diving into building your credit, it's crucial to understand the basics. Credit is a system that lenders use to assess your creditworthiness, or your ability to repay borrowed money. It's measured by your credit score, which is a numerical representation of your creditworthiness. Credit scores typically range from 300 to 850, with higher scores indicating better credit. The three major credit bureaus - Experian, TransUnion, and Equifax - gather data on your credit activities and create credit reports, which are used to calculate your credit score.

Get a Secured Credit Card: A secured credit card can be an excellent tool for building credit from scratch. Unlike a traditional credit card, a secured credit card requires a cash deposit as collateral, which becomes your credit limit. This minimises the risk for the lender and allows you to establish credit without a credit history. Use the secured credit card responsibly by making small purchases and paying off the balance in full and on time each month. This will demonstrate your creditworthiness and help you build a positive credit history.

Become an Authorised User: If you have a family member or a close friend with a good credit history, you can ask them to add you as an authorised user on one of their credit card accounts. As an authorised user, you'll be able to use the credit card, but the primary account holder will be responsible for the payments. This can help you build credit by piggybacking on your positive credit history. However, make sure the primary account holder has good credit habits and pays their bills on time to avoid any negative impact on your credit

Make On-Time Payments: Payment history is a significant factor in determining your credit score. It's crucial to make all of your payments, including credit cards, loans, and other bills, on time. Late payments can have a negative impact on your credit score and stay on your credit report for up to seven years. Set up reminders or automatic payments to ensure you never miss a payment.

Keep Your Credit Utilisation Low: Credit utilisation refers to the amount of credit you're using compared to your credit limit. Keeping your credit utilisation low is essential for building credit. Aim to use no more than 30% of your available credit, as higher utilisation rates can negatively impact your credit score. Avoid maxing out your credit cards, and if possible, pay off your balances in full each month to keep your credit utilisation low

Apply for a Credit Builder Loan: Credit builder loans are specifically designed to help people build credit. These loans are typically small, and the funds are held in a savings account or a certificate of deposit (CD) as collateral. You'll make monthly payments, and once the loan is paid off, you'll receive the funds, along with the interest earned. Credit builder loans are reported to the credit bureaus, helping you establish a positive credit history.

Monitor Your Credit Regularly: It's important to monitor your credit regularly to ensure that the information on your credit report is accurate and to detect any potential errors or fraudulent activities. You can obtain a free copy of your credit report from each of the three major credit bureaus once a year at AnnualCreditReport.com. Review your credit report for any discrepancies, such as incorrect personal information, or accounts that don't.

Building credit from scratch may seem like a daunting task, but with careful planning and disciplined financial habits, it is achievable. By starting with a secured credit card or a credit builder loan, making timely payments, keeping credit utilisation low, and establishing a positive payment history, you can lay a solid foundation for your credit profile. It's important to be patient and consistent in your efforts, as building credit takes time. Remember to monitor your credit regularly and make adjustments as needed. With perseverance and responsible credit management, you can build a solid credit history that opens doors to financial opportunities in the future.