How to Build Credit Score From Scratch to Buy or Rent a Home

Starting or improving your credit journey? Discover various strategies to build a strong credit foundation, ideal for those with no credit history or immigrants looking to establish credit.
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Credit rating/scoring has to be one of the most misunderstood topics in the United States.

This truly is a shame because a great credit score is not terribly difficult to attain.

Not to mention, having a great credit score can positively impact your financial life in countless ways.

If you ever want to purchase a home, rent a home, or buy a car in your life, not having credit will make much of this incredibly difficult to attain.

As a matter of fact, not having any credit makes it hard for anyone lending you money or leasing anything to trust you. You can say, in a way, it's a way of someone judging your character.

Although getting a great credit score isn’t tough, there are a lot of incredibly common misconceptions the general public has that not only don’t do anything to build your credit but actively put it in disrepair.

In this article, we’ll show you how to (and why you should) build your credit, improve it, and you can actually help the next generation get started on a healthy financial path.

When Is the Right Time to Build a Credit History?

It's never too late or too early to build credit.

Whether you're a middle-aged adult who never had a credit history or straight out of high school, starting your credit history can be beneficial and serve you well in life as long as you maintain at least fair credit.

As long as there is more life to live, having good credit standing will open doors for you.

However, timing is important as you want to start out on the right foot.

For example, if you plan on being out of the country for an extended period, it may be ill-advised to open up any kind of credit-building account as payments may be more difficult to manage, especially if you plan on traveling from place to place.

Another important fact to note is that building credit takes time.

You won't get a good credit score overnight, but the good news is that you could have a pretty good credit score after about a year.

That may not be long enough for many creditors to assess you as a borrower, but it's a start and can qualify you for some personal loans and unsecured credit cards.

How Do You Start Your Credit History From Nothing?

Figuring out where to start can be difficult for those building their credit up from nothing and might seem daunting, but it just takes some patience and good money-managing habits.

Before you get started, it's important to note that unless you are prepared to make consistent payments on time and committed to responsible money management, you shouldn't venture into starting a credit history.

Because if you are not consistent with paying down your balances on time, you'll end up with poor credit, which may be actually more difficult to repair than starting from scratch.

Secured Credit Cards

We typically recommend applying for a credit builder credit card or a secured credit card. This is the most common way people usually get their credit started.

These cards are designed specifically for those who are just beginning their credit-building journey.

Important to note, though, is that these credit cards are not for free and require a deposit of about two hundred to a few thousand dollars upon opening.

The deposit usually equals the credit limit.

After getting your first credit card, paying off your balances on time and in full is important. Be diligent about keeping your statement balance at $0.

This is important because, for most people, the credit line on their first credit card will be somewhere in the neighborhood of $200-$500.

So, if you have a $200 statement balance on a card with a $500 limit, that means your utilization will be 40%. Utilization rates that high will cause your score to drop drastically.

After your credit is established for several months, you might consider applying for another account.

This will help make your credit profile more robust by increasing your number of accounts and overall credit limit.

However, you don't want so many new accounts that you find managing them hard.

Once you’ve got a few credit cards, all you have to do is keep them open and pay them on time!

Get Added As an Authorized User

This is the same as becoming a shared user on an account.

If you have a trusted family member or spouse, they can add you to their account which may be a way to bypass any extra fees.

However, you will still need to make good bill-paying and spending habits in order to build a good score. If not, not only do you jeopardize yourself but also the credit rating of the shared cardholder.

A pitfall to avoid is accumulating a large balance as a result of joint spending.

You should lay out a specific payment plan or discuss purchases with the shared cardholder in order to make sure the balance never exceeds a certain amount.

David D. Schein, MBA, JD, Ph.D.
David D. Schein, MBA, JD, Ph.D.
Endowed Chair of Management and Marketing & Director of Graduate Programs at the Cameron School of Business, University of St. Thomas-Houston
Is there a "free" way to start your credit history other than with secured loans/credit cards?
Consistently paying every bill on time is pretty straightforward. Opening accounts for mobile phone service, cable or Internet service, utilities, renting an apartment, all help to establish credit without using a secured credit card. A secured credit card, however, is not a terrible idea and can help some young people get started.

Take Out a No-Credit Loan

Taking out a loan can jumpstart the credit history you might need. If you have no credit history it can be tricky to take one out.

However, there are soft-inquiry lenders out there that are willing to allocate a relatively small personal loan even to foreigners.

Examples of some of these types of companies are Stilt, Net Credit, Upstart, and Lending Point.

Once you have received a loan, it will get reported to the credit reporting bureaus.

Whatever you use the funds for, make sure you start making regular payments on time as required by your loan agreement in order to stay in the black.

Take Out a Credit-Building Loan

A credit-building loan is very different from a traditional loan. This is because a credit-building loan is specifically designed to help you build credit or improve.

It actually has little to do with taking out a loan to use for any expenses.

Only a few lenders offer this as a tool to either build credit from scratch or improve poor credit but it can be the perfect way for you to start your credit standing.

These are usually available through credit unions and community banks but there are also a few independent lenders like Self and Money Lion.

Think of credit-building loans as a program to simply show that you are able to pay off balances in a timely fashion and have it reported to at least one or all three credit-reporting bureaus.

You can't access the funds during the payment period. The payments are put into a special account as it comes in and actually accrues interest which you are also entitled to collect once you have paid off the full balance.

To maximize the experience you should make sure the loan will be reported to all three credit agencies. However, be aware that any late payment will result in penalties to your score.

Get Your Rent and Other Bill Payments Reported

For those people who were able to rent an apartment without a credit check, you might be able to use your rent payments to start or up your credit score.

FICO can now factor in positive payment behavior regardless of whether it has to do with credit or not but you have to sign up for this service.

An example is that you and your landlord can opt into reporting your rent payments to the credit bureaus.

This can help jumpstart your credit history or add more depth to your credit profile.

If you are great at paying your rent, then having your payments reported can only help you.

Likewise, you can get your good utility payments reported by signing up for a service like Experian Boost. And UltraFICO factors in your positive monthly banking balances to help your score.

Can Foreigners or Immigrants Build Credit in the U.S.?

Yes.As long as you have legal status either as a student or have work authorization in the U.S. you can apply for a credit card or a loan, using a social security number (SSN) or a taxpayer ID number (TIN).

Furthermore, if you have a family member who has a credit account in the States, you can ask them to make you an authorized cardholder.

Many of the no-credit-check loan providers such as the ones mentioned above are also open to having foreigners apply for the loans and accept applicants holding a number of different visa types.

Markia Brown
Markia Brown
Credit Literacy Coach
When and how should parents start educating their children about personal finance?
Parents should be introducing the conversations about money and fiscal responsibility as soon as children are old enough to understand the concept of bartering, and that age is different for every family. The conversations do not have to start with money in the traditional sense, but parents can have children "earn" screentime and when they run out, they can "borrow" more time in exchange for double the chores. This teaches interest and paying debts owed without being focused on money. I think it's important for children to understand the concepts behind money and not just the concept as it applies to money.

You Can Help Your Kids Build Credit and Fiscal Responsibility

If you think about any struggles you might have had with credit in your life, you'd want to make sure your children avoid the same pitfalls.

Also, consider that Millennials are buying homes for the first time later in life than previous generations.

Some of it is due to making different life decisions but also a big part of it is due to having larger amounts of student debt and money management issues typical with younger people.

We might expect younger generations like Y and Alpha to experience similar circumstances, as America's educational system does little to prepare young adults for their financial future.

One of the greatest gifts parents can give is to teach their children about fiscal responsibility which, in turn, leads to having great credit.

It can go beyond just explaining how allowances, salaries, and bills work because the best education is firsthand experience dealing with finances and accounts.

Opening Up a Bank Account or Debit Card For Your Child

There are a number of banking and finance apps and products developed specifically for children and teens, which are designed to give your children the gift of financial literacy.

Teaching your kids about budgeting is easier now than it has ever been, with the advent of services like Greenlight, Copper Banking, Chase First Banking, and Busykid, just to name a few.

These services allow parents to pay their children an allowance for doing chores, which they can then spend using the account’s associated debit card. (Parents can set limits.)

Accounts like these can go hand-in-hand with teaching your children about budgeting and allocating their money since these accounts give them first-hand experience.

As an adult it’s important to allocate some of your income to saving, investing, charity, rent, and other monthly expenses.

These apps and banking products actually go a long way to teach them the principles of these very things that you yourself might have missed out on as even an adult.

Adding Your Child To an Existing Account

This might seem like an outlandish idea to most but bear with us for a moment (and keep in mind, most card issuers allow you to set spending limits for authorized users), but adding your child to your as an authorized user can come with a host of benefits.

The first of which is that you can use it as an opportunity to teach them about the dangers of credit cards, and the effects of compounded interest.

They will quickly learn how dangerous a credit card can be if you review their monthly spending with them, and use a compound interest calculator to show them how expensive credit card debt can be over time.

Another benefit of adding your child as an authorized user to your credit card is there’s a good chance it will help them build credit.

This is because most banks will actually allow authorized users to inherit the credit history of the main account. This varies from bank to bank, so be sure to get confirmation before doing this.

If adding your child to a credit card account seems too scary, it might be a good idea to have them "practice" for a few years with a bank account or debit card first as mentioned above.

Then once they turn 18, you can either add them to an existing account or open a new credit card account together.

College might be the perfect time to practice paying for their own expenses like a grown-up while building their credit history for the first time.

How Is a Credit Score Used?

A credit score assesses how risky you are as a borrower.

Those with a higher credit score demonstrate more responsible borrowing habits and are less risky to lend to.

Whereas those with lower scores seem less responsible when borrowing, and are seen as riskier to lend to.

It’s important to remember though, that just because you don’t have an 850 credit score doesn’t mean you’re not a responsible person.

In fact, there’s a good chance that you’re just playing the whole “credit score game” wrong.

If you’re in this boat, don’t worry, many people are. And we’ll walk you through the factors contributing to your score and how to improve it below.

Who Utilizes Your Credit Score to Assess You?

Companies that regularly pull credit reports of applicants are usually lenders of different kinds.

Most Americans will experience their credit being checked when they go to apply for a mortgage, purchase a car, refinance, apply for credit cards, or even buy a mobile phone.

Besides lenders, other types of parties can and will use your credit score to make a decision about you.

Prospective landlords can take a look at your credit report and decide whether or not they want to let you live in their house/apartment.

Employers can pull your credit report and evaluate whether or not they will be able to trust you as an employee, particularly when it comes to positions that deal with sensitive legal issues or finances.

Even insurance underwriters and some utility companies will check your credit to make a determination about you.

Unfortunately, far too many people only find out that they don't have credit or bad credit when they are turned down for something important.

Why Is Having a Good Credit Score Important?

Not only is having credit but having a great credit score is important in so many facets of life.

Since your credit score is an evaluation of how trustworthy you are when it comes to money, there are countless entities that evaluate you using it, the most important of them being banks.

How Does Your Credit Score Affect Your Mortgage?

At the end of the day, your credit score is the largest factor in how much interest you pay for a loan.

Since those with lower credit scores are seen as “riskier”, banks charge them more interest, to compensate for the risk that they’re taking.

On the flip side, people with higher credit scores will be charged lower interest rates, since they’re seen as less of a risk.

To illustrate this, let’s take a look at an example:

Let’s say that two people are looking to take out a mortgage on a house for $500,000.

Person A has a great credit score, and Person B has a poor credit score.

We’ll also assume that they’re both looking to get a typical 30-year, fixed-rate mortgage.

Since Person A has a great credit score, we’re going to say that they’ll be charged a 3.5% interest rate.

Whereas Person B’s poor credit score is getting them an interest rate of 5%. On the surface, the difference doesn’t seem to be that much.

How much of a difference is just 1.5%, right?

Well, Person A will pay about $2,245 per month for their mortgage, which equates to $808,200 over the life of their loan.

While Person B will pay about $2,684 per month for their loan, equaling $966,240 over the course of their loan.

Due to the effects of compound interest, Person B will pay over $150,000 more for their mortgage than Person A.

This is why having a great credit score is so pivotal.

A great credit score can save you untold amounts of money throughout your life, leading you to be more financially secure and successful.

How Is Your Credit Score Calculated?

Your credit score is calculated using a variety of metrics that we’ll outline below.

Some of the more important ones are on-time payments, derogatory remarks, and credit utilization.

Depending on whether you’re checking your VantageScore or FICO score, the metrics that are taken into consideration will vary slightly.

FICO vs. VantageScore

As mentioned above, FICO and VantageScore are the two different types of credit scoring systems.

FICO is the go-to scoring system for most lenders when they evaluate your credit.

The factors that play into your FICO Score are as follows: Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), New Credit (10%), and Credit Mix (10%).

Although FICO scores are most commonly used by lenders, they are not very commonly used when it comes to online credit estimation software.

Websites like Credit Karma tend to show you your VantageScore when you log on.

The factors that go into your VantageScore are quite similar to that of FICO.

They are as follows: Payment History (extremely influential), Age and Type of Credit (highly influential), Percentage of Credit Limit Used (highly influential), Total Balances and Debt (moderately influential), Recent Credit Behavior and Inquiries (less influential), and Available Credit (less influential).

What Factors Affect Your Credit Score?

There is a myriad of factors that will affect your credit score.

Below we will take you through them all, and show you how to improve your credit score - don’t worry, it’ll probably be easier than you think!

Credit Utilization

Credit utilization is the amount of your overall revolving credit limit (the sum of all of your credit card limits) that is being used, compared to the amount available to you.

It’s important to remember that your utilization for a given credit card is only reported once per month after the statement closes.

The number used to calculate your utilization will be the statement balance reported.

A common misconception about credit utilization that you’ll often hear is that “banks want to see you carry a balance on your card”, which is patently false.

The best credit utilization rate you can have is 0%, which would mean having a $0 statement balance on all of your credit cards.

However, it’s not always possible to pay your cards off in full before the statement closes, so a utilization rate of less than 10% is usually seen as good.

The formula to calculate your credit utilization is shown below:

Credit Utilization = Sum of All Credit Card Statement Balances/Sum of All Credit Card Limits

Now that we know how to calculate credit utilization, we’ll take a look at an example:

For this example, we’ll assume that a person has two credit cards, one with a $1,000 limit and a $200 statement balance, and another with a $3,000 limit and no statement balance.

This person’s credit utilization would be 5% since their total statement balance is $200 and their total available limit is $4,000, and $200/$4,000 = 0.05.

Payment History

Your payment history is one of the most important factors that go into the credit scoring algorithm.

This is because the whole credit scoring system was derived around figuring out people’s propensity to pay their debts back on time.

Because of this, payment history has a huge effect on how your credit score is calculated.

Fortunately for us though, paying your bills on time isn’t usually very difficult.

With the advent of online account management and automatic payment capabilities, it’s easier than ever to make sure your accounts are paid on time.

If you want a hands-off approach to finances, you can set up automatic payments, and never have to worry about missing a payment, ever.

Hard Inquiries

A hard inquiry is added to your credit every time a company does a “hard pull” on your credit. This is usually only done by banks when you apply for some sort of loan product.

Unfortunately, as the number of hard inquiries you have increases, your score will decrease.

However, they don’t have a particularly large effect on your score.

This is mainly because it’s hard to tell what kind of borrower a person is based on the number of hard inquiries that they have on their credit.

For instance, a real estate investor with several mortgages may have a bunch of hard inquiries from applying for those mortgages, however, they’re probably a trustworthy borrower.

On the flip side, someone who has been recently laid off and is applying for several credit cards to support their lifestyle may not be the best person to lend to.

Both of these people will have quite a few hard inquiries, but it’s hard to tell who’s riskier without more information.

Average Age of Accounts

Another factor that credit scoring agencies will look at is the average age of all of the accounts you have open (both credit cards, and other loan products).

Generally speaking, the older your average age of accounts is, the higher your score will be.

This is because it is believed that those with established accounts, that have been in good standing for long periods of time tend to be better (or at least more predictable) borrowers.

Unfortunately, there isn’t much you can do to affect your average age of accounts though.

When it comes to increasing your average age of accounts, it is literally a waiting game.

That’s why it’s important to establish a few credit cards that you never plan on canceling early in life.

That way, those accounts can grow with you, and increase your credit score along the way.

Total Number of Accounts

The total number of accounts is another factor that’s fairly self-explanatory.

Credit scoring agencies look at the number of open credit accounts that you have (whether that be credit cards, auto loans, mortgages, etc.), and factor that into the calculation of your credit score.

This is another area where misinformation is very commonly spread.

Most people will tell you that having too many open credit accounts is a bad thing, or that you shouldn’t have more than “X” credit cards.

This is another common misconception that is blatantly false. In reality, the more accounts you have, the better your credit score is going to be.

If you’d like to score highly in this area, the optimum number of accounts to have is 21 or more.

Of course, if you want to open up 21 accounts, you’re going to rack up quite a few hard inquiries and lower your average age of accounts by quite a bit though.

Both of these things will, of course, decrease your credit score in the short term.

This phenomenon may have been what led to the misconception of “having fewer accounts being better”.

Derogatory Remarks

A derogatory remark is an indication that you defaulted (didn’t pay) one of your debts.

It’s important to remember that even if you pay your credit cards and bank loans on time, you can still have a derogatory remark on your credit report.

Any entity that has your social security number and extends service to you before you pay can report to a credit agency that you’ve defaulted.

In the United States, medical debts are one of the most common derogatory remarks on people’s credit reports.

Oftentimes, it’s not even the patient’s fault that their debt isn’t paid too.

The medical billing process is overly complicated, and documentation can get lost in transmission.

The optimal amount of derogatory remarks on your credit is, of course, 0.

If you do have a derogatory remark on your credit though, there’s a good chance that it’s fairly easy to get rid of.

All you have to do is reach out to the entity that you owe money to (or the collection agency they sold your debt to), and try to come to a payment agreement.

Oftentimes, in exchange for payment of your debt, the reporting entity will retract the derogatory remark from your credit report.

How Do You Check Your Credit Score?

Nowadays, there are countless ways you can check your credit score.

One of which is by requesting an actual copy of your credit report from one of the three major credit bureaus (Transunion, Equifax, and Experian).

Each of the credit scoring agencies will send you one free copy of your credit report per year.

If for some reason you order more than one report within a year, you will have to pay for it.

If you don’t want to formally request a copy of your credit report, there are countless tools on the internet that allow you to get an estimate of your credit scores.

One of our personal favorites is our partner, Credit Karma.

They allow you to quickly and easily access an estimate of your score from Transunion and Equifax that’s updated daily.

How Can You Increase Your Credit Score?

Increasing your credit score is actually quite easy in practice. It just takes a little bit of planning up front, and some diligence in the long term.

The easiest way to build your credit score up from nothing is to get a couple of credit cards over a year or so and make sure they’re paid off on time and in full.

Once you have your cards open, and you’re paying them off, all you really have to do is wait, and potentially add another couple of cards along the way.

As you build a more robust credit profile, with more accounts, and more on-time payments, don’t forget to keep your utilization low.

While utilization has less of an effect once you’ve had a few credit cards for a couple of years, it still has quite a large effect on your score in the short term.

Also, be sure that you’ve got some diversity in terms of the banks that issue your credit cards.

Credit card issuers rarely go out of business, but anything can happen, and you wouldn’t want your hard-earned score being flung out the window, just because your accounts were canceled at no fault of your own!

Read on: How to Improve Your Credit Score to Get Approved for an Apartment

At the end of the day, having a great credit score is incredibly important.

Not only will your credit score dictate where you live, but it will also dictate how much you pay for the larger purchases you make throughout life.

Additionally, building a great credit score isn’t rocket science. It’s actually quite easy and takes minimal effort in the long term.

Zach Hewke
About the author

Zach Hewke is a writer for PropertyNest, focusing mainly on personal finance and real estate investing. His expertise lies in the finance space and has contributed to major finance/money sites as well as top-rated firms.