How to build credit from scratch

There are plenty of areas where credit can influence people’s lives. But if you’re trying to establish credit, things may seem a little backward: You have to actually have credit in order to build credit from scratch.

Yeah, it may seem a little strange. But understanding some credit basics can help you get started. 

Here’s how you can build credit from scratch and use it responsibly.

Key takeaways

• Applying for a credit card or a loan can help you start building your credit. 
• Those who may not qualify for a credit card right now can consider becoming an authorized user.
• Building credit takes time and effort. 
• To build credit, it’s important to practice good financial habits and monitor your credit routinely as you start to build your credit.

There are multiple ways to establish a credit history, both with and without a credit card. Here’s a look at steps you might be able to take to start building credit:

1. Apply for a credit card designed for building credit.
2. Become an authorized user on another’s credit card.
3. Apply for a credit-builder loan.

No matter which method you use to build credit, it’s important to practice responsible credit habits, like making payments on time each month. And monitoring changes to your credit score can help you track your progress.

When you apply for credit cards, you’re asking for a type of open-ended loan from a lender. As your application is considered, the lender may take into account your credit history by looking at your credit report, according to the Consumer Financial Protection Bureau (CFPB).

If you have no credit history, there may not be much for a lender to consider. And that, the CFPB says, could make it more difficult to secure loans, housing and employment.

But some credit cards are designed with this in mind. The following cards can be used to help establish and build credit if they’re used responsibly. That means doing things like making on-time payments each and every month. 

Secured credit cards

Secured credit cards are a lot like traditional cards, with one main difference: They require a deposit.

If you’re approved for a secured card, you put money down to open the account. That money acts as collateral, similar to a security deposit for an apartment rental. Your deposit is usually refundable. 

With a Capital One secured card, there are two ways your security deposit can be refunded: You could earn back your deposit as a statement credit by using your card responsibly. Or Capital One will refund it when you close your account and pay your balance in full.

Beyond the deposit, secured cards function like traditional cards. And they often look much the same too. But keep in mind that credit limits on these cards may be lower, and they may not have rewards or bonuses.

Student cards 

There are some credit cards designed with college students and recent graduates in mind. And like with other credit cards, responsible use of your credit card may help you build credit. That means doing things like making on-time payments every month.

Some student credit cards offer cash back rewards and other perks, too. In some cases, you may not even need to be a student to apply for one of these cards. Check with your lender for more details about eligibility and benefits.

Cards for fair to average credit

If you’ve begun to build credit, but it’s still not perfect, you may still have options. In fact, many credit card companies offer cards for exactly these cases. A good starter card, when you use it wisely, may be a good tool to help you build your credit. And it may even have features like no annual fee or cash back rewards. 

If you get one, just be sure to use it responsibly. Remember, the goal is to help—not hurt—your credit score. That means it’s important to do things like pay bills on time and stay within your credit limit.

If you’re struggling to qualify for a credit card on your own, there may be other alternatives. One option is to become an authorized user. You can become an authorized user if someone gives you access to their existing credit card account.

If you’re added as an authorized user, you get your own card, but the original card owner is responsible for payments. In other words, that account owner must trust you to use the card responsibly. Any negative actions, like missed payments, could reflect poorly on both your credit ratings.

If both you and the primary cardholder use the credit card responsibly, then it’s possible that being an authorized user may be a way in which you can work to build credit. But the opposite is also true, according to the CFPB.

Discussing responsibilities and spending habits with the cardholder can help you get off on the right foot. With some cards, the cardholder can also set a spending limit for any purchases you make as the authorized user. Some issuers, like Capital One, may also provide online access for eligible authorized users.

A co-signer may vouch for you to help you get your first credit card. Just keep in mind that many major issuers don’t allow credit card co-signers. 

By signing along with you on a credit card application, a co-signer agrees to pay the bills if you can’t. The only way to build credit with a co-signer is with responsible card use. And like the authorized user scenario, irresponsible use has consequences. 

The CFPB says both your credit and that of your co-signer’s could take a hit if you’re late or delinquent on card payments. The CFPB also says co-signers are required to pay missed payments—and even full loans—if the borrower doesn’t pay them back.

There are some differences, though. A co-signer may not get a card of their own, receive statements or have access to make any changes to the account without your permission.

A loan may also give you the chance to establish credit. As with credit cards, when you make loan payments responsibly, your credit score could benefit. Some loans are even aimed at those new to credit. 

Credit-builder loans

As their name suggests, credit-builder loans (CBLs) are designed with a different goal in mind than traditional loans. And because of that, they work a little differently: Borrowers make payments before getting the money.

Credit unions typically offer CBLs, according to the CFPB. But they may be available elsewhere too. The loans start with the lender depositing a small amount—around $300 to $1,000—into a locked savings account. Borrowers then make small payments over a set period, known as a term, which is usually six to 24 months. When the term ends and all payments are made, the money is paid out. 

As payments on a CBL are made, progress is reported to credit bureaus. That’s how a CBL can help you build credit. But it’s important to take payment due dates seriously. Late or missed payments could end up hurting your credit, the CFPB says.

Other loans

Mortgages, student loans and car loans can also affect your credit. If you have debt like this, you may have already established a credit history. So it wouldn’t make sense to apply for them to build credit from scratch. But keeping current with your payments can help you continue to improve your credit.

However, falling behind on payments for secured loans, like car loans or mortgages, can do more than just affect your credit. That’s because the vehicle or property is used as collateral. And in a secured loan, if you fall behind on payments, you could risk losing the collateral.

It takes time to establish credit from scratch. After you’ve established credit, it’s still important to practice responsible habits.

1. Make payments on time

Credit scoring companies FICO® and VantageScore® both say payment history—specifically, your track record of making on-time payments—can be a significant factor in determining your credit rating. You might consider setting up automatic payments to ensure you don’t miss a payment due date. You could also use email reminders or calendar alerts to remind yourself. 

2. Create a budget

Creating a budget to compare your income to expenses is a key step to reaching your financial goals, the CFPB says. Seeing where your money goes each month could help you set aside loan or credit card payments before you start spending each month.

3. Exceed minimum payments

It can be tempting to keep making only the minimum payment you see on your credit card statement. But ultimately, it’s counterproductive. Those minimum payments come with a cost—interest charges. And interest can add up, costing you more money in the long run and making it harder to pay off debt. Take it from the CFPB: “Paying off your balance each month can help you get the best scores.” 

4. Stay under your credit limit

Maxing out your card’s credit limit could reflect negatively on you and your financial situation, according to the CFPB. Experts recommend using no more than 30% of the total credit you have available.

5. Be careful with credit applications

Applying for a bunch of credit at once isn’t likely to help you build credit any faster. In fact, it could make your financial situation look worse than it is, according to the CFPB. That’s because credit scoring takes into account your recent activity. And multiple hard inquiries could hurt your score.

Once you start to build credit, it may be a good idea to keep track of where you stand. You can get free copies of your Experian®, TransUnion® and Equifax® credit reports by visiting AnnualCreditReport.com. 

And there’s also CreditWise from Capital One. When it comes to monitoring your credit, CreditWise makes it easy. And it’s free, whether you’re a Capital One customer or not. Plus, using CreditWise won’t hurt your score, so you can check it as often as you like. That’s a major plus if you’re working to build credit.

Here are a few answers to commonly asked questions that first-time credit builders tend to have.

Why is credit important?

Credit is an important financial indicator that shows lenders your ability to repay debts. Your credit will come into play when applying for things like credit cards, mortgages, auto loans and more. And improving your credit score can help you qualify for better interest rates and loan terms.

What is a good credit score?

Each credit model uses different factors to assess your credit. A good credit score can vary depending on the model. FICO says a score between 670 and 739 might be considered good for its scores. VantageScore says good scores might fall between 661 and 780. But typical scores can be better than good. The most popular FICO and VantageScore credit score ranges go as high as 850.

How long does it take to build credit?

Building credit takes time—especially when you’re starting from scratch. With patience and determination, you can typically expect to see your first credit score appear somewhere between three and six months. Though this will largely depend on the credit scoring model being used to judge your credit.

There’s no official timeline for building credit from scratch. But there is a bottom line: Building credit can take time, and it requires financial responsibility. By steadily making progress, you may set yourself up to one day reach bigger financial goals, like buying your own home.

Ready to get started? See if Capital One has a credit card for building credit that’s right for you.