Building Credit 101: Credit Mix and How to Build Your Credit from Scratch

Having good credit history affects your ability to get new credit and your interest rates and terms. Typically, people who build credit history and have a prime or near-prime credit score see more approvals and lower interest rates.

If you haven’t had a credit card or taken out a bank loan, you may not have an established credit report. But that doesn’t mean you can’t get there. Here we’ll show you how to build a credit history so you can reach your financial goals.

Key Takeaways:

Your credit history is a record of how you manage your finances. To build a credit history from scratch, apply for loans and credit cards only as you need them, keep your debts low, and pay your bills on time every month. Over time, low debts and timely payments will help you build a solid credit history.

How To Build Credit History

Your credit history shows how you use money. Detailed information about what loans you take out and how you pay your bills goes into your credit report, and that data is used to determine your credit score. The three major credit bureaus are Experian™, Equifax®, and TransUnion®. Here is how to start a credit history:

Show a positive payment history

Making on-time payments can help your credit score tremendously. And it makes you more likely to be approved with lower APRs, better terms, and higher credit limits. Start small with a secured or unsecured credit card you can easily pay off each month. Set up an automatic payment so you’re always covered or set calendar reminders a few days ahead of the due date.

Keep credit card debt low

Your credit utilization ratio — or the percentage of your debt compared to your available credit limit — is a key factor in your credit score. Some experts say to keep it below 30 percent, but lower is always better. More importantly, if you are carrying a balance on your credit cards from month to month, work on paying them in full to save yourself money on interest and improve your credit score. 

How Long Does it Take to Build Credit History?

Once you start using credit, you generally need to have at least six months of activity to get a credit score. Continue to make your payments on time and keep your credit utilization ratio in check to build excellent credit history over time.

How Can I Build Credit with No Credit History?

It may be frustrating to find out that you need a credit history to get a new credit card or bank loan. Even worse, lenders may try to charge you higher interest rates. These strategies can help:

Get a credit card that’s right for you

If you’re unable to get a traditional unsecured credit card, consider a secured credit card, which requires a refundable security deposit. Some new cards factor in your banking history when you apply and don’t require a deposit. Before signing up for one of these cards, make sure that your information will be reported to all three major credit bureaus so it will count toward your credit history. And be sure to read the disclaimers, comparing the terms and conditions, including the annual fee and APR.

Become an authorized user on an existing account

A trusted family member may add you as an authorized user to their credit card. This can be a good option if your family member has excellent credit and pays their bills by the due date each month. However, make sure you discuss the details of this arrangement with your family member and know what you expect from each other.

Take out a loan

It’s generally not a good idea to apply for a loan you don’t need. However, certain loans, known as “credit builder loans” are designed to help improve your credit score. You’ll secure the loan with your own money (typically set aside in an investment bearing account). The lender issues the loan for that amount. You make the monthly payments on time, the lender reports your positive credit history, and your secured funds are released when you finish repaying the loan. While these loans can be beneficial,  make sure you read the disclaimer and understand the terms of your loan and can make the payments on time each month. Much like with your first credit card, missed payments on your loan can negatively impact a good credit score.

Aim for a diverse mix of credit

Having a diverse mix of credit (or a variety of loan products) can give your credit score a small boost. While not a major factor, you can improve this by adding different financial products as you need them. For example, by adding a secured credit card and then a credit builder loan to your profile.

However, you should never take on more credit than you need. If you only need one credit card with a small limit, you can still build a good credit score.

Unfortunately, you can’t build a credit history overnight. But by following the steps outlined here you will be well on your way.