April 4, 2019

How to build credit from scratch

If you’re still in high school or college, you probably don’t have a credit score yet. While that may not be a problem today, it could be when you decide to buy your first home. Planning well ahead of time to build up your credit score is a smart move. In this guide, you’ll learn how to build credit from scratch using the three most common methods.

Each method has its own pros and cons. We’ll lay everything out for you so that you can decide which strategy you like the most. You may be surprised at how fast you can build an impressive credit score! Check your credit score for free with Credit Karma.

1. Secured Credit Cards

We’ve dedicated an entire article to secured cards. But since we’re discussing how to build credit from scratch, let’s cover them again briefly.

When you open a secured credit card, you are required to put down a security deposit (usually $200-$300) before being issued a card.

  • For most secured credit cards, your credit limit will be equal to your security deposit.
  • By requiring the security deposit, banks are guaranteed that they be able to at least recoup any charges you make with your card (even if they aren’t able to recoup all the interest charges).

Yes, putting up a security deposit stinks, but it can help you get approved for a card when you have little to no credit history.

The good news is that if you get one of the best secured cards, it shouldn’t take long for the credit card issuer to “graduate” you to the unsecured variant of the card. And your security deposit will be returned at that time.

Related: What Factors Affect Your Credit Score?

What to look for in a secured credit card

Some secured credit cards are better than others. Here are a few things that you’ll want to pay attention to when shopping for a secured card.

  • Clear upgrade path. You’ll want to find a secured card that clearly states how many on-time payments you need to make before your card will be reviewed for unsecured status.  For instance, the Discover it® Secured Credit Card will consider graduating you to an unsecured version after 8 months and the Capital One® Secured Mastercard will do so after 5 months.
  • Low deposit amount. Some secured credit cards will allow you to put less of a security deposit down than your credit limit. For instance, the Capital One® Secured Mastercard® could give you an opening credit line of $200 with a deposit of only $49 or $99.
  • Rewards. Believe it or not, some secured credit cards will give you cash back on your purchases just like regular reward cards. For example, the Discover it® Secured Credit Card gives 1% cash back on all transactions and a 2% bonus on the first $1,000 spent on gas and groceries each quarter.
  • Interest rate. Most secured credit cards have sky-high interest rates (often north of 25%). But some secured cards buck this trend. For instance, the Green Dot primor® Visa® Gold Secured Credit Card offers a fixed-rate 9.99% APR on all purchases. While we highly recommend that you pay your balance off in full each month, interest rate is still a factor that needs to be considered.

Unless you are a college student, grabbing one of the secured cards listed above is probably the best way to start building credit from scratch. Check your credit score for free with Credit Karma.

2. Easy-Approval Credit Cards

While I believe that choosing a high-quality secured credit card is typically the best way to build credit from scratch, there are a few unsecured card options as well.

  • Unsecured credit cards that are geared towards consumers with thin credit files are often referred to as “starter cards” or “easy-approval” cards.
  • On the surface, getting an unsecured credit card from the get-go sounds like a no-brainer.
  • However, many easy-approval credit cards charge higher fees and charge ridiculously high interest rates.

While having to put up a security deposit is an inconvenience, you shouldn’t settle for a far inferior credit card just to avoid it.

Best Easy-Approval Credit Cards

While there aren’t a ton of starter credit cards that I would recommend, there are a few fairly good ones:

  • The Capital One Platinum Credit Card: It doesn’t offer any rewards, but doesn’t charge an annual fee either. That’s a great deal for an unsecured card when you have little or no credit history. And you can always apply for an excellent rewards card later after you’ve built up your credit score.
  • The Petal Visa Credit Card: What’s so cool about the Petal Visa Credit Card is that the issuer connects with your bank accounts to see how you manage your money. If you’ve been regularly paying bills like rent, utilities and insurance on time,  you’ll have a great chance of being approved! This card offers no rewards but also charges no fees whatsoever.
  • The Capital One® QuicksilverOne® Cash Rewards Credit Card: The standout feature of this card is that it offers 1.5% cash back on all purchases. That’s 50% better than the market average for even unsecured credit cards. And, remember, this is a card that accepts consumers with limited or fair credit. That’s an awesome deal. The downsides? The QuicksilverOne® charges a high interest rate (26.99%) and a $39 annual fee. But even so, this is still one of, if not the, best easy-approval card on the market.

3. Student Credit Cards

College students have an easier time qualifying for unsecured credit cards than other consumers who have limited credit histories. Special cards called “student credit cards” are available only to students who are actively enrolled in college. Many credit card issuers also include a financial education course to educate new cardholders about handling credit responsibly.

In times past, credit card issuers would set up on tables on university campuses. And to entice students to sign up for cards they would offer all manner of goodies. The results were that many college students were drowning in debt before they had even graduated from college.

Thankfully, the Card Act of 2009 instituted some new rules around how card companies can market and issue student cards.

  • Card issuers can no longer give free stuff away to lure students in.
  • College students under 21 years of age can no longer be approved for a student credit card (without a cosigner) unless they have their own individual source of income.

Best Student Credit Cards

There are several excellent student credit cards. Below we’ve listed just a few of the most popular ones:

  • Discover it® Student Cash Back Credit Card: This card offers 5% cash on rotating categories every quarter. There is no annual fee and the interest rate is reasonable. Your first late payment is forgiven and late payments will never increase your interest rate. Discover will double the cash back that students earn in their first 12 billing periods and will give a $20 statement credit to students who maintain a 3.0 GPA.
  • Citi Rewards+℠ Student Credit Card: This card has no annual fee and offers a 0% introductory rate for 7 months. Cardholders receive 2% on supermarket and gas station purchases (up to the first $6,000 spent) and 1% on all other transactions.
  • Bank of America Cash Rewards Credit Card for Students: This card has no annual fee and 0% introductory APR for the first 12 months. Cardholders earn 3% on the category of their choice and 1% on all other transactions. This card also offers a $150 sign-up bonus if you spend at least $500 in the first 3 months.

Conclusion:

There’s one method that we didn’t cover in this guide for building credit from scratch. And that method is to get added as an authorized user to someone’s else’s credit card (like your parents).

  • Becoming an authorized user on an established card can improve your credit score. But the benefits will be slight compared to the strategies listed above.
  • Plus, the authorized user method requires putting your parents or someone else at a slightly higher risk.

Instead, I would just apply for an excellent secured, easy-approval or student card, and use it responsibly. Do that and you’ll be well on your way to building a high credit score from scratch. Check your credit score for free with Credit Karma.

About the author 

Clint Proctor

Hi, I'm Clint! I love writing about everything personal finance. In addition to this site, my work has been featured on several major publications including Business Insider, Forbes, Credit Karma, and U.S. News and World Report. My hope is that you'll be able to find plenty of helpful information and inspiration on this site to help you reach your financial goals. Thanks for visiting!

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