How to build up your credit history? Where to start?


You may have heard, “Cash is King,” but building excellent credit is a must in our credit driven society.

Great credit will help you rent apartments, take out mortgages and cut insurance rates. But building credit is full of traps and pitfalls, and misinformation abounds.

Below we offer a step by step guide on how to build credit from scratch. This is what we cover:

  • Checking whether you have any credit history
  • Finding your first form of credit
  • Automating responsible credit use
  • Signs that you’re ready for more credit

Step One: Check whether you have credit history

If you’ve never borrowed money, you may be shocked to learn that you may have a credit history. Most of the time, a credit history only contains information about credit accounts. However, unpaid bills can make it onto your report too. Your phone or utility company may report late payments or collection items to the credit bureaus. Unfortunately, these companies only report negative information to the credit bureaus.

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It’s also common to have information about medical bills on your credit report. If you arranged an installment payment plan from a hospital visit will show up as a loan. If you didn’t pay the loan, you will see medical bills in collections on your report.

To check your credit history, visit This site gives you access to your credit report from all three credit reporting bureaus. You should also get your latest credit scores using web services such as requires a social security number to access your credit report. If you do not have a social security number, you can Individual Taxpayer Identification Number to request a copy of your credit report by mail. Mailing your credit report request to Experian, Equifax and Transunion.

When you review your credit report look for three things. First, check if you have a credit report. It’s common to not have any credit report if you’ve never borrowed money. When you’re working to build credit for the first time, this is the best situation.

Next, be sure that you’re not the victim of identity theft. If you have a credit history, you should recognize the information on your credit report. If you see credit accounts that you never opened, report the problem to the FTC and your local police department. The FTC will give you a customized plan for fixing your credit history. But beware, cleaning up identity fraud takes time- sometimes months.

The last thing to look for is evidence of credit history problems. If you have late or unpaid bills, you may struggle to get your first line of credit. You can fix the damage over time, but you need to be strategic about fixing your credit. Resolve to make on time payments while you build your credit history.

Step Two: Find your first form of credit

When building credit from scratch, you might struggle to find your first form of credit. But even people without credit history have options. Unless you’re in active bankruptcy, you should have access to some form of credit. These are some of options for credit builders to consider.

Store or Gas Station Credit Cards

Department stores and gas stations often issue low balance credit cards that you can only use in the store. Some stores will issue credit as long as you have an income and an address. Others will not accept you unless you have a credit history. On the whole, these cards are easier to get than standard credit cards.

When you get one of these credit cards, pay off the entire balance each month. The interest rates on store cards tend to be twice as high as standard credit cards.

Do not sign up for a store or gas station credit card that has an annual fee. You will want to keep your first credit card open for as long as possible.

Fee Free Secured Credit Card

If you will not use a store or gas station credit card, consider applying for a secured credit card instead. A secured credit card is a credit card backed by a deposit. Secured credit cards have low limits (between $200-$500), but they help you develop a credit history.

Look for one with no maintenance fees and no annual fees. Also, look for a card at a bank that has appealing rewards cards. Most of the time, you can upgrade a secured credit card to a rewards credit card at the same bank after a year of excellent credit behavior. You can do this with a simple call to the bank.

You do not want to cancel a secured credit account, since credit length plays an important role in your credit score. When you upgrade your credit card, the bank will return your initial deposit or apply it to your next statement balance.

Most US Citizens with a thin credit history will have easy access to any secured credit card. If you’re a recent immigrant to the United States, you may have more trouble. American Express and Digital Federal Credit Union work with immigrants more often than other banks. If you’re an immigrant, you may have better luck finding a secured card at one of those banks.

To boost your credit score in a hurry, never spend more than 10% of your card limit. Even more importantly, pay the bill on time each month.

Federal Student Loans

If you’re an American student, you will qualify for Federal Student Loans. Subsidized Stafford Loans have a rate of 3.76% and payments can be deferred when you’re in school. These loans also have low origination fees.

You won’t build credit history until you start making payments on your loans. However, Federal Student Loans might be a good choice if you need financial aid to pay for school.

Federal student loans are among the cheapest ways to borrow money. These loans are especially helpful for students with no credit.

Savings Secured Installment Loans

Another low cost way to build credit is taking out a savings secured installment loan. A savings secured installment loan is a loan where you make a payment each month. The bank deposits your payment into a CD. At the end of the term, you receive the CD less the cost of interest paid to the bank.

Since a bank risks no money on these loans, almost anyone can qualify for a savings secured installment loans. Not every bank offers these loans. Work with a local credit union to find a loan that works for you.

These loans are great while they last, but you will need to open a new form of credit after you’ve paid it off.

With Caution: Become an Authorized User

Becoming an authorized user on someone else’s credit card can help you build credit. Be careful if this is the route you choose. If you choose to become an authorized user, the other person’s bad habits will show up on your credit account. This means that their late payments, their overuse, or their collection items become yours.

Even well meaning people (like your parents) may not be savvy credit users. Unless you have confidence that the primary cardholder will pay their bill on time and in full, avoid becoming an authorized user.

When you become an authorized user, you need to be sure that the bank will report the credit card usage to the credit bureaus. If not, you’re taking on risk without getting any rewards. You can clarify the benefits of becoming a card user through a call or meeting with the issuing bank.

Step Three: Automate Responsible Credit Use

Once you find the right form of credit, automate responsible credit use. Responsible credit users pay their bills on time, every single month. Your credit card will allow you to draft the minimum payment each month. Setting this up will allow you to keep your credit statement clean.

You will build even better credit if you keep your credit utilization low. One way to do this is to use your credit card to pay for a single, stable bill. For example, you can pay for internet or your cell phone using your credit card. It’s easy to automate a monthly payment for the amount of your bill. Just be sure to avoid using your card for anything else or you’ll start racking up interest charges.

If you’re using a credit card, you should aim to pay your bill in full each month. In general, you cannot automate a payment to draft the full balance from your credit card, but you can payoff the balance as you go with a tool like Debitize.  Debitize connects credit cards to your debit account, so you never spend money you don’t have.

Most installment loans will allow you to auto-draft a monthly payment straight from your checking account. The lender may even give you a discount for this. Auto-draft is a great way to automate good credit behavior.

Automation is a great precaution to take when building credit, but you still need to take responsibility for your credit use.

Step Four: Signs You’re ready for more credit

After 12-18 months, most responsible credit users will move from no credit score to a good or excellent credit score. Once you have a good credit score, you’ll start to receive offers for more credit from different banks.

As you start to receive offers, you can take it as a sign that you might be ready for more credit.

When this happens be strategic about taking out more credit. You need to decide how you’ll use credit in the future. Do you want to keep credit in the background, do want to use credit to earn rewards, or do you want to use credit to borrow? Depending on your goal you’ll take different steps.

If you want to keep credit in the background

If you want a good credit score to avoid negative consequences, turn your credit use onto autopilot. Get a single, unsecured credit card and pay your phone bill with the card. Pay off your card on time and in full each month. If your first credit account was a secured card, ask the bank to transfer you to an unsecured account after 12-18 months. You do not want to cancel your first credit card if possible. An old credit account adds to a robust credit history.

Early on, you may want to ask your bank to increase your credit limit. That way, you can use your credit card to rent a car or hold a hotel room.

Anytime you plan an international trip, you will need to look into a travel credit card. You can cancel your travel credit cards after you pay them off if you’re worried about identity security.

Even though you want to keep credit in the background, it’s a good idea to review your Free Annual Credit Report.

If you want to use credit to earn rewards

If you’ve prove that you can use credit responsibly, you may want choose to use credit cards to earn rewards. Take note: Credit card rewards only pay off if you pay your bill in full every month.

Rewards credit cards offer points or cashback options. Some credit users choose to use a single credit card with a cash rewards option. Other people churn through credit cards to maximize signup bonuses for travel. If you choose to churn rewards credit cards, be sure to cancel credit cards that have an annual fee.

Using credit to earn rewards can be a lucrative option, but you need to build great credit practices first. If you sign up for multiple accounts, check your credit report every year, and consider monitoring your credit score more often.

If you want to borrow money

If you want to use your great credit score to borrow money, take a more hands on approach to managing your credit. Stay on top of your credit score, and avoid applying for loans until you have excellent credit.

Take advantage of 0% financing opportunities, but take notice that these loans have expiration dates. If you don’t pay off the loan before the end of the promotional period, you may end up paying back interest. Read the fine print before you borrow money at low rates.

If you’re looking to borrow on home mortgages or auto loans, be sure that the payments fit into your overall budget. No matter how great the financing is, it’s not a good deal if you can’t afford it.

Finally, be sure to check your credit report at least once a year. If you depend on your credit to borrow money at low rates, you need to be sure it is accurate.

Pitfalls to avoid when building credit

Building credit doesn’t need to be a struggle, but you might fall into a few traps. Some credit builders try to take on too much too soon. They apply for every type of credit that can get and end up falling behind on their payments.

Take a slow and steady approach to building your credit, and in in time you can have an excellent credit score.

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