The Ultimate Guide to Establishing and Building Your Credit

It’s a three-digit number that can decide a loan request: your credit score. Your credit score will help determine if you qualify for a line of credit, as well as the interest rate you’ll have while repaying the loan. The higher your credit score, the lower the interest rate will likely be, which ultimately can save you a lot of money on repayment over the life of the loan, especially when you’re buying a home.

If you feel like it’s difficult to get a line of credit because you don’t have any credit history for a lender to look at, you are not alone. So how do you get good credit when you don’t have any credit to start with? No worries, this is your ultimate guide to helping build your credit from nothing.

First off, the process of building your credit from scratch won’t happen overnight, but you can start seeing results early on. It often takes about six months to begin establishing credit.

Ways to begin your credit journey when you have no credit include:

• Apply for a secured credit card or become an authorized user on a parent’s/guardian’s card
• Make your payments on time and, if possible, pay the balance in full
• Keep the balance low on your cards
• Manage any student loan payments
• Have a co-signer on a loan
• Monitor your credit report regularly
• Build credit with the bills you already pay each month

Now let’s go into some more detail on how to establish and maintain credit with these tips. Just remember, Clayton is not a financial advisor, so please consult a professional for help building your credit.

Build your credit with a secured credit card

A secured credit card is a card supported by a deposit, for example, $250, that’s paid upfront. It may seem strange to open a card for a line of credit and providing the money for it upfront, but this method allows you the opportunity to show credit worthiness. You will get the deposit back when you close the account. (A little tip: try to keep the account open if possible, even if you don’t use it often. This will help you continue to gain credit, and closing a credit related card can often hurt your score.) Check with your bank or a local credit union to see if they offer a secured credit card option.

Become an authorized user on a parent or guardian’s card

If a secured credit card isn’t the route you would like to take, becoming an authorized user on your parent or guardian’s credit card could be a good jump start to building your credit. (If this isn’t an option, you could also consider asking a trusted, longtime friend to add you.) Essentially, you would be gaining credit based on the activity of their card. However, you inherit that person’s highs and lows, and you may become responsible for the obligations of the account, so please consider this option carefully.

Make payments on time

If you want the key to success when it comes to building your credit, this is it. Setting a reminder on your phone or calendar can help with paying on time. Also, setting up automatic bill payments might be an option that you prefer. If at all possible, pay the balance in full. When building your credit, this practice looks very good on your credit history because it shows that you are disciplined and can pay consistently at the same time.

Keep your balance low on credit cards

If you can’t pay your credit card balance in full each much, paying as much of the balance as you can is still very helpful for two main reasons. First, the lower the remaining balance is, the less you pay in interest.

And second, for building and maintaining your credit, it’s important to keep a low balance and not max out the limit. It is recommended to keep the balance at less than 30% of the credit line.

Student loans can help build credit

Yes, your student loans can help your credit because you credit report shows the payment history and longevity of the loan. If you are making monthly payments on time, your credit score will continue to get stronger.

Use a co-signer

If you can’t begin a loan on your own, you can find a trusted, responsible co-signer, preferably with good credit. Co-signing allows you the chance to get a loan as you are establishing your credit because it takes the co-signer’s credit score into account as well. Just make sure you understand all of the requirements and responsibilities involved if you were to become unable to pay back the loan.

Monitor your credit report often

It’s important and easy to monitor your credit. You can sign up through one of the free credit report programs and monitor the activity reported. You can dispute any errors or discrepancies you see by contacting the credit bureau or the creditor directly. When reading your credit report, you will see a report from all three major credit bureaus – Experian®, Equifax® and TransUnion®. All three bureaus may have different items reported to them, or your credit report and score could be largely identical across all three. It just depends on who the creditor chooses to report the activity to.

Build your credit with the bills you already pay each month

You might be thinking, “What about all the monthly bills I pay? Can those help build my credit?”

If you currently rent, check with your landlord to find out if they are reporting your payment history to any credit bureaus. If not, with the help of some resources, there are ways to report your monthly rent and reflect your good payment history.

As for your other monthly bills like your cellphone, some of your monthly payments may be reported to credit agencies. When you sign up for one of those monthly obligations, make sure you have it in your name so you can get credit for the payment history. Most importantly, make sure you always pay them on time or it will hurt your credit.

Things not to do while trying to build your credit

While you are working on building your credit, there are some things to be aware of so you don’t cancel out all the work you have done. Here are a few things to consider.

Be cautious of how many times you have your credit pulled. If you are shopping for a car or another large purchase, or looking to take out a loan, try to do all of your loan shopping at one time within 14 days because it will usually only count as one credit inquiry hit.

Don’t let your medical bills go unpaid. As of July 2022, most medical bills are not reported to your credit unless they go unpaid for more than a year, in which case they may negatively impact your credit score. Contact the medical billing office and discuss payment options that work for you. That way you can pay the medical bill over time and prevent it from being reported as a late payment or in collections on your credit.

We hope that these steps will have you well on your way to an awesome credit score and another step on your journey to your dream home! Credit is an important tool for any large purchase, and this guide will help you gain confidence as you make bigger and longer-term investments. As you work on building your credit, why not build out your ideas of what you want in a home? Get inspired and start saving your favorite Clayton homes today!

All trademarks are the property of their respective owners. Clayton is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act. Clayton does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating.